Monday, February 06, 2006

Windfall Profits Tax on Big Oil: A Big Mistake

Reacting to the record-high gas prices, U.S. Sen. Byron Dorgan introduced a 50 percent windfall profit tax on every barrel of oil selling for more that $40. According to his misguided legislation, money from this tax would be refunded to consumers. Besides being misnamed a profit tax, there are many problems associated to this excise tax.

First, the tax would be levied only on U.S. companies, thus placing domestic oil producers at a competitive disadvantage to their non-U.S. rivals. Second, over the past decade, major oil companies have earned lower than normal profits. In 1998, oil prices were $11 per barrel and major oil companies were earning below average profits. If the federal government is going to levy a windfall profits tax in periods of above normal profits, it must provide subsidies in times of below average profits. Third, a decline in refining capacity and a significant reduction in oil production have been the primary factors generating higher gasoline prices over the past six months. A windfall profit tax would reduce oil companies’ ability to restore production and would likewise minimize the incentive for oil companies to invest in refinery capacity. Such a tax would jeopardize the nation’s ability to become more energy efficient and would make the nation more dependent on foreign oil.

Finally, compliance costs for such a program would be significant. In 1984 a General Accounting Office report called the WPT of the 1980s as "perhaps the largest and most complex tax ever levied on a U.S. industry." Adding to the problems of the WPT of the 1980s, the tax yielded less revenue than anticipated throughout its existence -- and none at all in its later years. Quite often the best policy action from the government is “no action.” First do no harm.


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