NCPA - National Center for Policy Analysis


May 12, 2008

In their ongoing war against U.S. oil producers, Senate Democrats say they'll slap Big Oil with a windfall profits tax and take away $17 billion in tax breaks, among other punishments.  The planned 25 percent tax on windfall profits would be imposed on oil company earnings above what the Senate's wise members decided was "reasonable."  Never mind that what's "reasonable" to one person might be punitive to another, says Investor's Business Daily (IBD).

The last time the United States had a windfall profits tax on oil companies, the results were disappointing:

  • Over the entire 1980-1986 period, the (windfall profits tax) reduced domestic oil production from between 320 million barrels . . . and 1,268 million barrels according to the Congressional Research Service.
  • Oil companies were hit hard by the tax, and in line with basic economic theory, they produced less oil, not more.

The effect of reducing domestic oil production was to increase the level of imported oil, says IBD:

  • At the time, the United States imported about 30 percent of its oil; today, we import about 60 percent.
  • In part, that jump in oil dependency was due to the huge tax advantage we gave foreign oil companies in the 1980s -- and to the continuing advantage we give them today by refusing to let our oil companies produce more crude from our own reserves.

Revenues from the windfall tax were far less than expected, because producers pumped less and nontaxed imports flooded our market.  Compared with a forecast of $393 billion in windfall tax revenues from 1980 to 1988, Congress got a mere $80 billion.

Source: Editorial, "Democrats Windfall Tax—On You," Investor's Business Daily, May 8, 2008.


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