The latest inflation numbers from the US Department of Labor show that inflation has jumped by 7.9 percent over the past year, with energy inflation at a staggering 25.6 percent, including 38 percent for gasoline alone. These troubling numbers illustrate the degree to which Americans are suffering by the hidden tax that is inflation.
Unfortunately, even though there is no shortage of common-sense policies that the Biden Administration and Congress can pursue to reduce energy costs and support our allies like Ukraine, some politicians are calling for even more taxes on the US energy industry. The latest bad idea comes from Senator Sheldon Whitehouse and Congressman Ro Khanna, who have introduced the “Big Oil Windfall Profits Tax” (WPT).
In contrast to inflation, which is a hidden tax on the American people, a windfall profits tax is a transparent tax increase that would raise taxes on oil companies producing or importing 300,000 or more barrels per day in 2019 by an estimated $22.50/barrel. With gas prices at all-time high, a new energy tax like the one proposed by Whitehouse-Khanna could not come at a worse time for every American family. This proposal would both directly raise the cost of crude oil (which is refined into gasoline and jet fuel) and reduce energy production (which hurts our economy and our national security).
In our industry, companies don’t set the price of oil and gas, the global marketplace does. Industry continued to produce oil and gas at a loss when prices were low, and we continue to increase production now to meet demand. As the economy recovers and demand increases, there is upward pressure on prices. Factors on the supply-side that affect prices include production, net imports, and storage inventory levels. Targeting the oil and natural gas industry – at moments in time when prices are high due to global market forces outside our control and extreme supply/demand disruptions – further discourages long-term investment in oil and natural gas.
Members of Congress should closely examine the negative impacts of the windfall profits tax signed into law by President Jimmy Carter in 1980, which put a 70 percent excise tax on crude oil exceeding $12.81/barrel. Not only did the tax bring in just 20 percent of the promised revenues, but it reduced domestic production by up to 6 percent and made us more dependent on foreign oil imports by up to 16 percent. It also had the unforeseen consequence of making the “US more vulnerable to sharp oil price increases or complete oil supply embargoes from foreign oil producers.”
Congress repealed Carter’s windfall profit tax in 1988 due to its higher administrative burden on the oil industry and the IRS and “the recognition that the tax kept domestic oil production below what it would have been without the windfall profits tax and increased petroleum imports above the level of imports without the WPT.”
Fortunately, there are bipartisan steps the Biden Administration and Congress can take to help lower energy prices at home, including:
- Clearly and unequivocally signal support for domestic production of oil and natural gas
- Restart regular leasing on federal lands
- Quickly approve pending LNG export applications
- Support the buildout of new pipeline capacity
- Stop targeting the industry with new taxes and fees
An anti-American energy windfall profits tax was a bad idea in 1980 and it is a bad idea now. This new tax on energy will raise prices for consumers at a time of historic inflation. Policymakers should reject this discriminatory tax and instead focus on solutions that will unleash the safe, responsible production of America’s vast oil and natural gas resources.
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