The High Cost of Windfall Profits Taxes

Jonathan Williams, an economist at the Tax Foundation in Washington, highlights some often-missed facts when politicians call for windfall profits taxes on oil industry earnings:

 

The last time this country experimented with such a tax was the Crude Oil Windfall Profit Tax Act of 1980.  According to a 1990 Congressional Research Service study, the tax depressed the domestic oil industry, increased foreign imports and raised only a tiny fraction of the revenue forecasted.  It stunted domestic production of oil by 3% to 6% and created a surge in foreign imports, from 8% to 16%. 

 

Politicians calling oil companies “greedy” is more than a little ironic.  Tax Foundation studies have shown that state and federal treasuries profit handsomely from oil industry sales.  The average American motorist pays taxes of 46 cents a gallon on gasoline, of which 18.4 cents a gallon goes to the federal government.  States and localities pocket the rest. 

 

The nation’s energy companies are already providing a “windfall” of taxes.  According to Department of Energy data, from 1977 to 2004, federal and state governments extracted $397 billion by taxing the profits of the largest oil companies and an additional $1.1 trillion in taxes at the pump.  In today’s dollars, that’s $2.2 trillion—enough to buy a Toyota Prius for every household in the nation.  In fact, oil companies have paid in taxes more than three times what they earned in profits during those 28 years. 

 

As the oil industry brings in record profits, it also pays record taxes that average 39% worldwide, even after accounting for special deductions and credits.  That compares with a 33% average tax rate for other industries.  In 2005, Chevron, ConocoPhillips and Exxon Mobil paid more than $158 billion in total worldwide taxes.  This gargantuan tax bill nearly equals the entire economic output of Iran and surpasses the total gross domestic product of 150 of the 184 countries ranked by the World Bank.

 

Source: “Crude Economics,” Los Angeles Times, April 29, 2006