Windfall Profits Taxes Are Back? Again

April 25, 2006

As national gasoline prices top $3 per gallon, some of our elected officials are cashing in on their opportunity to score political points by attacking the oil industry. The nation’s capital suffers from a predictable case of the “do something disease,” and every lawmaker wants to find a government solution to rising gas prices.

While lawmakers in California debate a windfall profits tax for their state, numerous lawmakers in Washington, D.C. have renewed calls for a federal windfall profits on oil companies.

From the Detroit Free Press:

Sen. Carl Levin, D-Mich., said Sunday on CNN’s “Late Edition” that the president should push for a windfall profits tax on what he called the oil companies’ extreme, obscene profits.

Sen. Arlen Specter, R-Pa., said on the same show that a windfall profits tax is “something worth considering,” as well as legislation targeting consolidation of oil companies.

In a recent statement that condemned “profiteering” by oil companies, Pennsylvania Governor Ed Rendell added: “The profits are ungodly; there is no excuse for this…Oil companies should not be permitted to drain Americans’ bank accounts to collect record-breaking profits.”

Statements like this bear more than a hint of irony. Previous Tax Foundation work has illustrated that local, state and federal treasuries themselves profit substantially from oil industry sales, collecting billions of dollars in tax revenues annually. Currently, local state and federal gasoline taxes total to an average of 45.9 cents per gallon of gasoline purchased.

As we’ve detailed before (http://www.taxfoundation.org/legacy/show/1168.html), the federal windfall profits tax of the 1980s was a failed experiment. It raised only a fraction of the revenue originally projected, and ended up steeply curtailing domestic oil production—the opposite of what the law was intended to do.

Judging from recent statements by lawmakers supporting windfall profits taxes in recent days, it appears that those who fail to learn from history are indeed doomed to repeat it. Let’s hope lawmakers come to their senses and reject recent attempts—however politically popular—to impose economically harmful surtaxes on domestic energy producers.


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A 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.

A 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.

A surtax is an additional tax levied on top of an already existing business or individual tax and can have a flat or progressive rate structure. Surtaxes are typically enacted to fund a specific program or initiative, whereas revenue from broader-based taxes, like the individual income tax, typically cover a multitude of programs and services.