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Tax Gouging at the Pump

2 min readBy: Scott Hodge

Politicians in Washington and in state capitals are responding to consumer complaints about sky-rocketing gas prices with charges that the oil companies are earning “excessive” profits and gauging consumers at the gas pump. Lost in the political rhetoric is the fact that those “excessive” profits are net profits—that is, profits earned after taxes are paid to government. And while the oil companies have enjoyed a few good years, history shows that governments at all levels (foreign and domestic) have profited more from the oil industry than have its shareholders.

Recent data from the Energy Information Administration shows that since 1981—the first year of the Windfall Profits TaxA windfall profits tax is a one-time surtax levied on a company or industry when economic conditions result in large and unexpected profits. Inheritance taxes and taxes levied on lottery winnings can also be considered windfall taxes on individual profits. —total taxes paid to state, local, and the federal government from all oil industry sources exceeded the combined profits of all companies in every year but the past three. Between 1981 and 2006, U.S. governments collected $1.65 trillion in total taxes after adjusting for inflationInflation is when the general price of goods and services increases across the economy, reducing the purchasing power of a currency and the value of certain assets. The same paycheck covers less goods, services, and bills. It is sometimes referred to as a “hidden tax,” as it leaves taxpayers less well-off due to higher costs and “bracket creep,” while increasing the government’s spending power. . That is 65 percent more than the combined earnings of the 16 largest domestic oil companies during the same period.

These figures do not include income taxes paid to foreign governments on profits earned in those countries. EIA data indicates that domestic oil companies paid $518.9 billion in income taxes to foreign governments between 1981 and 2006.

As the chart below shows, during most of that 25-year period, taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. collections by all U.S. governments were nearly twice industry profits in any given year. Indeed, in 2002, before the recent price spikes, the industry earned a collective $20.5 billion in profits. However, domestic governments collected more than $50 billion in combined income, property, severance, and excise taxes in the same year.

To see the data used in this table, click here.


Regardless of these facts and the historical fact that the 1980 windfall profits tax actually depressed domestic oil production and increased U.S. dependence on foreign oil, many politicians are calling for a new round of “windfall” profits taxes on domestic oil companies. The lost lesson in all of this is that the economic cost of any of these taxes is ultimately paid by real people, not “big oil” or any other industry.

As economists of all stripes understand, the economic cost of business taxes is borne either by workers through lower wages, shareholders through lower dividends and stock prices, or consumers through higher prices. Thus any attempt to punish oil companies will eventually punish the same people politicians purportedly are trying to help. That is far more unconscionable than any real or imagined price gauging at the pump.