Consumers nationwide are feeling a pinch due to surging energy prices. After reaching a five-year low earlier this year, prices are now approaching a five-year high. It’s no surprise this price whiplash has attracted the attention of policymakers in Washington. Yet, rather than real solutions—such as permitting reform or further regulatory changes—some Democrats are once again pushing a policy idea that should have stayed buried decades ago: a “windfall profits” tax. Like every bad idea in Washington, this one refuses to die.
Back in 2022, during another spike in energy prices, Senator Sheldon Whitehouse (D-RI) joined Representative Ro Khanna (D-CA) in proposing the “Big Oil Windfall Profits Tax Act” to impose a 50% excise tax on oil produced or imported by large energy companies. As I wrote four years ago, “energy prices are ultimately driven by supply and demand, not by politicians deciding certain industries are earning “too much” profit. When supply is constrained and global demand remains strong, prices rise.” Taxing production does not change that reality—it makes it worse.
Those same members of Congress recently introduced what is effectively the same bill to capitalize on public discontent with fuel prices.
It’s the same bill that will have the same devastating economic consequences. It deserves to stay in the legislative graveyard rather than get serious consideration in Congress.
The basic flaw in a windfall profits tax is straightforward: if you tax something, you get less of it. Imposing punitive taxes on domestic energy production discourages future investment in exploration, drilling, refining, and infrastructure. Companies respond rationally to incentives and penalties. When the government signals that higher production and successful investment will simply be punished with new taxes, fewer projects get financed and less energy gets produced over time.
That means less supply, which ultimately means higher prices for consumers.
We also know from real world experience that a WPT is just a bad policy. Research from the eight years (1980–1988) a windfall profits tax was in effect shows it can significantly affect our economy. The Congressional Research Service notes in a comprehensive report from 2006 that the tax was widely considered unsuccessful, and if reinstated, would have “several adverse economic effects” such as reduced return on capital investments within the energy sector, increased foreign oil imports, reduced production of oil, and higher consumer prices over the long run. For the reasons described below, the tax was repealed by the Omnibus Foreign Trade and Competitiveness Act of 1988:
- Failed to generate anticipated revenue. During its tenure, the tax generated gross revenue of about $80 billion, or 80% less than the projected amount of $393 billion.
- Hurt domestic producers. When in effect, the tax reduced domestic oil production from between 320 million barrels (1.2% of domestic production) and 1.27 billion barrels (4.8% of domestic production). This resulted in an increase of oil imports to the United States.
- Distorted business decisions. “Since the tax was imposed on oil production, extraction was penalized and other aspects of the business (refining and marketing, the downstream operations) became relatively favored. Thus it created financial incentives to shift resources from exploration and drilling to refining and marketing.”
- Administrative headaches. A 1984 General Accounting Office report called the windfall profits tax “perhaps the largest and most complex tax ever levied on a U.S. industry.”
In the years after its repeal, NTU has always strongly opposed efforts to reinstate this poorly crafted tax.
In fact, at NTU’s office, we have a framed letter signed by 250 economists including Nobel laureate Milton Friedman sent to Congress urging against the adoption of such a tax. As written in that letter “if it is enacted again, a windfall profits tax can be predicted to result in a diminution of domestic energy production, an increase in American dependence on foreign oil, and a reduction in the overall supplies available to consumers.”
These economists are right. While data is murky on the short-term impacts of a windfall profits tax, it is certainly likely to lead to price increases over the long term. Since the tax would reduce the incentive to sell oil, it would ultimately hamper capital investments today into oil exploration and extraction projects. So, in effect, a tax on profits today will lead to less exploration, less drilling, and less oil in the future. Since this tax is aimed at corporate drillers and importers, the consequences are likely to be felt all the way through the supply chain and on consumers.
Rather than spend time debating policies that won’t help the situation, Congress should work on bipartisan permitting reforms to lessen the time it takes to bring energy projects online. There’s also smart tax and regulatory reforms that would make it more attractive to produce here at home.
America has experienced this terrible policy before and it would be misguided to bring it back to life. Keep this windfall profits idea in the history books rather than the House bill hopper.