Continued high gasoline prices—despite drops in recent weeks, they are still well above $2.00 per gallon—along with announcements of record high quarterly profits by most major oil companies have led to some strange logic in Washington. If high oil industry profits coincide with high pump prices, the logic goes, then reducing those profits via confiscatory taxes will somehow lower prices at the pump. Based on this reasoning, Sen. Byron Dorgan—sponsor of The Windfall Profits Rebate Act of 2005, S. 1631—and others have tried to resurrect the windfall profits tax, which would sharply raise taxes on oil.
The windfall profits tax is a tax levied on oil producers when the price of oil exceeds some predetermined level. Dorgan’s S. 1631 would impose a 50 percent tax on the price of oil above $40 per barrel. Thus, at the current market price of about $60 per barrel, each barrel an oil company sells or refines would be taxed an additional 50 percent on the $20 “windfall” above $40, or $10. This tax would be imposed on top of the 35 percent federal corporate income tax and other taxes on the industry. Under the bill, the government would rebate the proceeds of the windfall tax to the public.
There is considerable populist appeal in raising taxes on “big oil” at a time when the industry can most easily afford it and then giving the proceeds to taxpayers. But the last time it was tried, the windfall profits tax backfired badly. It discouraged the expansion of domestic energy supplies and led to increased oil imports. According to a 1990 Congressional Research Service study, the windfall profits tax in place from 1980 to 1988 “reduced domestic oil production from between 3 and 6 percent, and increased oil imports from between 8 and 16 percent.”[2] In effect, putting domestic oil producers at a disadvantage had the unintended effect of strengthening OPEC’s hand. In the end, the tax hurt consumers more through higher energy prices than it helped them through higher tax revenues, which turned out to be far lower than originally predicted because the tax discouraged production.
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What is amazing is that while people like Dorgan jump up and down and screech about gas prices that are too high legislators in many states (Minnesota and my home state North Dakota) are trying to pass (or have passed, in the case of Minnesota) laws punishing gas stations for selling gas too cheaply!
Does this make any sense? These politicians don't want gas too high, yet they don't want it too low. Apparently they think we should just nationalize the energy industry so that they can dictate a price that is "just right" for all of us citizens.