President Biden recently announced his intention to seek congressional approval for a windfall profit tax on domestic oil and gas producers.
History has shown that a profits tax is a bad policy that inevitably has damaging economic impacts without a meaningful increase in government revenues. Most recently, the U.S. implemented a profits tax on U.S. oil producers from 1980 to 1988. According to a report by the Congressional Research Service, this tax reduced domestic oil production over the eight years it was enacted by at least 320 million barrels, and at most 1.3 billion barrels. This drastic drop in domestic supply increased oil prices and made the U.S. more reliant on foreign oil producers, increasing imports by between three percent and 13 percent.
Although we cannot know the true impact of Biden’s proposed windfall profits tax without further policy details, we can use the impact of the 1980 windfall tax as a guide. The 1980’s tax reduced oil production by between 1.2 percent and 8 percent over an eight-year period. The Energy Information Administration (EIA) estimates that U.S. crude oil production for 2022 averages 11.7 million barrels per day, meaning that if President Biden’s proposal had a similar impact, it could reduce domestic production by between 140,000 to 936,000 barrels per day.
According to the Joint Committee on Taxation, a recent proposal for a windfall profits tax in the Senate introduced by Sen. Sheldon Whitehouse (D-RI), the Big Oil Windfall Profits Tax Act (S. 3802), would collect $62.2 billion in revenues over 10 years, while also providing a rebate to taxpayers. Based on the estimated $62.2 billion revenue, the average taxpaying household would receive $60-$65 in FY 2023, if the law provided for equal rebate amounts per taxpaying household (136 million total, loose estimate). If they base the rebate estimate off of taxpayers (i.e., multiplying each joint filing household by two to account for the two taxpayers; 184 million total) then the total would be $45-$50 in FY 2023. In other words, about a single tank of gas. Although President Biden has not yet announced which specific policy proposal he would support.
The country is also currently experiencing a diesel shortage. The EIA recently reported the U.S. only has 25 days of reserve diesel at its disposal. By imposing a tax on profits now, President Biden would be disincentivizing increased diesel production, which could exacerbate the energy crisis.
The Biden administration has worked to curtail domestic oil production since entering office in 2020. Their agenda has included an attempt to impose a moratorium on new oil and gas leases on federal land, canceling the Keystone XL oil pipeline project from Canada into the U.S., halting oil drilling in the Arctic National Wildlife Refuge, and calling for a gas tax holiday that would accelerate consumer demand for gas without increasing supply.
President Biden’s threat to tax oil producers on their profits is exactly what we do not need as we head into a winter where affordable, plentiful energy will be vital for so many parts of the country.
Making progress on the oil and gas crisis is possible if Congress and the Biden administration focus their efforts on increasing supply rather than raising taxes. Implementing failed policies like windfall profits taxes would only increase costs to taxpayers while ensuring gas prices remain high.