Windfall tax

A windfall tax is a tax levied on a business or an industry that has benefited greatly from favorable economic circumstances. Governments typically levy a windfall tax when certain industries enjoy significantly above-average profits due to favorable economic conditions or atypical circumstances. Windfall taxes are designed to divert a share of one industry’s excess profits to benefit the greater social good. They are most often levied on commodity-based businesses but can also be imposed on individuals who may have won the lottery or a game show, received an inheritance, or won certain damages in a lawsuit.

Background

Before the United States entered World War I in 1917, US Steel and DuPont’s annual profits increased by more than 1,000 percent each, resulting in pressure to impose a “war efforts profit tax.” That tax was levied in October 1917 and raised almost $7 billion in revenue. It became the largest source of wartime taxation and paid for nearly 40 percent of the war’s expenses. As larger companies found ways out of the tax, however, smaller companies suffered more, and the tax was abolished in 1921.

President Jimmy Carter’s administration reintroduced the tax, imposing the Crude Oil Windfall Profit Tax (WPT) of 1980. A 2006 report from the Congressional Research Service showed that the WPT generated $80 billion in gross revenues between 1980 and 1988 rather than the $393 billion that had been projected. Further, because the WPT was deductible against the income tax, its cumulative net revenues were about $38 billion instead of the $175 billion projected. Windfall taxes that have fallen far short of projections have also been seen in the global marketplace. According to the Washington Post, the windfall tax in Italy yielded only about one-fifth of its projected income in late 2022.

Less-than-anticipated revenues and arguments about negative consequences led to the windfall tax’s demise once again. Carter’s WPT was repealed in 1988 after a Congressional Research Service report noted that it may have reduced domestic oil production anywhere from 1.2 percent to 8 percent over the eight years that it was levied and dependence on imported oil grew between 3 and 13 percent during the same time.

Overview

In the wake of the global pandemic and Russia’s invasion of Ukraine in the early 2020s, the windfall tax was once again the subject of intense public debate in the US and worldwide. American and global oil and gas companies saw a huge increase in net income, largely because of the war. The International Energy Agency estimated that 2022 would show oil industry profits that were twice as much as in 2021. This caused world leaders to act or threaten to act to capture some of that revenue during financially strenuous times for average individuals and families.

In late 2022, the Council of the European Union agreed to impose a “temporary solidarity contribution” on businesses in the crude petroleum, natural gas, coal, and refinery sectors on profits that exceeded by 20 percent the average yearly taxable profits since 2018. Proceeds were meant to help households and companies recover from high electricity prices.

President Joseph Biden followed suit, also in late 2022, and threatened to impose a windfall tax on American oil and gas companies, which reported extremely high profits but continued to charge high prices. Biden suggested that these companies either expand oil supplies or reduce consumer prices. Earlier, in March 2022, US Representative Ro Khanna (D-California) and Senator Sheldon Whitehouse (D-Rhode Island) had introduced H.R. 7061, the Big Oil Windfall Profits Tax Act, which would impose an excise tax on the windfall profits of crude oil on taxpayers who extracted and imported more than three hundred thousand barrels of taxable crude oil in 2019 or who extracted and imported that amount in the current calendar quarter. The bill, which was referred to the House Ways and Means Committee, establishes the Protect Consumers from Gas Hikes Fund to finance rebates to individual taxpayers. Whitehouse, chairperson of the Senate Budget Committee and a senior member of Senate Environment and Public Works Committee, reintroduced the act on February 14, 2023.

According to the New York Times, energy suppliers were seeing unexpected bonanzas not because they devised any savvy strategies on their own but because Europe suddenly shifted from Russian gas and oil after the Ukraine invasion. The London-based Shell company, according to the New York Times, reported that it had earned $20 billion in just six months, while BP earned $16.6 billion. TotalEnergies, based in Paris, reported profits of nearly $29 billion during the same period. American energy companies reported similar staggering profits.

United Nations Secretary General António Guterres urged all governments to tax these excessive profits for the benefit of the most vulnerable people, and several nations obliged, despite prolific debate surrounding the tax. In making his threat, President Biden accused major oil and gas companies of wartime profiteering and said he wanted a new windfall tax unless the companies increased production.

Advocates of windfall taxes say governments can use proceeds to boost funding for social programs, while critics say windfall taxes can reduce companies’ profit-minded initiatives and may result in decreased production. The tax critics contend that companies should reinvest their own profits to promote innovation and thereby benefit society. They also note the history of revenues that are less than projected.

Distinguished Democratic economist Larry Summers has been a vocal critic of the tax, noting that oil is a boom-to-bust industry and oil companies lost billions of dollars or even went bankrupt in 2020 when oil prices crashed below zero for the first time ever during the COVID-19 recession. Reducing profitability, he said, discourages investment. He also noted that Exxon underperformed in the overall market for five years, beginning in the late 2010s.

Advocates, meanwhile, said revenue is revenue, and the dollars captured from the windfall tax would not otherwise have been available to offset high prices and benefit consumers.

According to the New York Times, several economists noted that a windfall profit tax would make the most sense when energy companies are making enormous profits while families and businesses are crushed under the weight of staggering energy costs. They downplay concerns about stifling industry investment and note that many oil and gas companies are using the newfound revenue to increase payouts to shareholders and buy more of their own stock to increase its price.

In October 2024, the UK government increased the windfall tax on North Sea oil and gas producers from 35 to 38 percent and extended its duration by a year. This adjustment raised the overall tax rate on these companies to 78 percent.

Bibliography

Bousso, Ron, and Arunima Kumar. "UK Increases Windfall Tax on North Sea Oil Producers." Reuters, 30 Oct. 2024, www.reuters.com/business/energy/uk-increases-windfall-tax-north-sea-oil-gas-producers-2024-10-30

Cohen, Patricia. “Will Taxing the Windfall Profits of Oil Giants Fix Countries’ Economies?” New York Times, 18 Nov. 2022, www.nytimes.com/2022/11/18/business/economy/windfall-taxes.html. Accessed 8 Feb. 2025.

Egan, Matt. “Biden’s Oil Windfall Tax Would Backfire, Warns Larry Summers.” CNN Business, 1 Nov. 2022, www.cnn.com/2022/11/01/economy/larry-summers-oil-profits-windfall-tax/index.html. Accessed 8 Feb. 2025.

“H.R.7061-117th Congress (2021–2022): Big Oil Windfall Profits Tax Act.” Congress.gov, Library of Congress, 11 Mar. 2022, www.congress.gov/bill/117th-congress/house-bill/7061. Accessed 8 Feb. 2025.

Kagan, Julia. “Windfall Tax: Definition, Purposes, and Examples.” Investopedia, 5 Aug. 2024, www.investopedia.com/terms/w/windfalltax.asp. Accessed 8 Feb. 2025.

Whitehouse, Senator Sheldon. “Big Oil Windfall Profits Tax Act.” Senate.gov, www.whitehouse.senate.gov/imo/media/doc/Big%20Oil%20Windfall%20Profits%20Tax%20Summary%20FINAL.pdf. Accessed 8 Feb. 2025.