Windfall Profits Tax

Windfall Profits Tax

Recently, oil companies have been raking in record profits off the price of crude oil and gasoline. These profits are coming at the expense of consumers, whose wallets have been increasingly pinched at the gas pump.

In an effort to recover a portion of this obscene largess, legislators at the state and federal levels have been considering the imposition of a windfall profit tax (WPT). The WPT is a tax on oil company profits that exceed a pre-determined baseline year of greasonableh profits. The tax is applied as a surtax on the company's state corporate income tax.

The revenue from a windfall profits tax could provide refunds for middle- and low-income consumers and/or be invested in renewable energy and efficiency programs.

Tax Fairness Organizing Collaborative members held a conference call to discuss this policy idea with Tyson Slocum, director of Public Citizen's Energy Program.

For more information about Windfall Profits Tax, please see:

• "Gas Price Gambit" by Tyson Slocum


• "It's Time for a Windfall Profits Tax" by David Sirota

Mythbusting: Answers to Common Arguments Against Windfall Profits Tax

Argument against: The spike in gas prices are due to Hurricane Katrina.

Answer: Oil and gas prices - and company profits - were rising long before Hurricane Katrina wreaked havoc. Price spikes are part of the long-term trend of high prices and huge energy company profits that stem in part from uncompetitive markets (due to mergers and acquisitions in the oil industry).

Argument against: If you look at oil company profitability (profits as a share of total sales), the numbers really aren't that good.

Answer: Oil companies themselves brag to shareholders and investors about their record profits. ExxonMobil's annual report states "ExxonMobil believes that return on average capital employed (ROCE) is the most relevant metric for measuring financial performance in a capital-intensive business such as" petroleum. Under this measurement, they received a 31% rate of return on average capital employed (globally). In the US, their domestic drilling provided a 46% ROCE and domestic refining returned 59%

Argument against: It's only fair that oil companies profit now, since they are making up for lean years in the 1990s.

Answer: It is true that oil companies had lean years in the 1990s. But as a result, they radically realignment themselves through mergers and acquisitions to ensure that they would never be unprofitable again.

Argument against: Windfall profits tax didn't work the last time we tried it (in 1980).

Answer: shortly after the tax was enacted in 1980, crude oil prices steadily decreased then bottomed out, so the effectiveness of the tax was diminished. However, it is widely believed that world oil markets aren't going to collapse anytime soon because the major oil producers are already producing at full capacity, supplies remain tight and investors are pouring money into oil markets.

Argument against: A windfall profits tax will cause oil companies to stop building new refineries or expand existing ones.

Answer: Oil companies are not building new refineries because it is in their financial self-interest to keep refining margins as tight as possible, which means bigger profits. This has nothing to do with tax policy.

Argument against: Such a tax will punish domestic companies while favoring out-of-state or foreign companies.

Answer: Oil refineries are multi-billion dollar facilities-companies are not going to shut them down or abandon them simply because a state has imposed a new tax on their operations. There are huge infrastructure considerations to take into account that would make re-locating facilities nearly impossible.

Argument against: Won't the tax simply be passed on to consumers?

Answer: The cost of taxes on a company are primarily born by the corporation and its shareholders. Also, companies set their prices to maximize their pre-tax profit, so taxing away a small portion of their profit won't change their pricing.