Windfall Profits Tax: Been There, Done That, Hated It

Posted: October 8, 2008 in Economy

From “Oil Company Profits and Tax Collections: Does the U.S. Need a New Windfall Profits Tax?
11/05 (link)

Figure 1 illustrates the magnitude of government tax collections versus industry profits between 1977 and 2004. During this period, the 29 largest domestic energy firms earned a collective $630 billion after adjusting for inflation. These profits varied dramatically—from a low of $7.9 billion in 1995 to a high of $42.6 billion in 2004—based upon world market demand, supply, and international events.

In contrast, the taxes paid or remitted by domestic oil companies have been consistently far greater than their profits and now total more than $2.2 trillion (adjusted for inflation) over the past quarter century. The largest share of those taxes is federal and state gasoline excise taxes. In 2004, governments collected $58 billion in gasoline excise taxes. Overall, governments have collected $1.34 trillion in gasoline excise taxes since 1977.

Today, U.S. consumers pay an average of 45.9 cents per gallon in gasoline taxes. The federal gasoline excise tax is 18.4 cents per gallon while the average state and local tax is 27.5 cents. The vast majority of these taxes are levied at a flat rate per gallon—regardless of whether a gallon of gas costs $1.49, $2.49, or $3.49. Thus, the effective rate of these taxes can vary wildly, from roughly 31 percent in the former case to 13 percent in the later.

Federal and state governments also collect a substantial amount of excise tax from the sale of diesel fuel. In today’s dollars, governments have collected $160 billion in diesel fuel excise taxes since 1977.

Oil companies also pay taxes to governments for the right to extract oil from public lands and waters. For example, the federal government has collected a total of $48.8 billion in royalty payments from oil companies in exchange for their ability to explore and drill in the U.S. outer continental shelf. Oil companies also pay severance taxes to state governments for the right to drill on state lands. Unfortunately, complete data on state severance tax collections for the period is not available at this time.

In contrast to excise taxes, corporate income tax payments vary as widely as industry profits. As mentioned above, domestic energy companies earned a total of $630 billion in post-tax profits between 1977 and 2004. Tax Foundation economists estimate that companies paid $518 billion in corporate income taxes to federal and state governments during the same period. These payments varied from a low of $5.1 billion in 1995 to a high of $40.4 billion in 1981.

  1. Couldn’t we just cut all of the loopholes and collect the taxes? The money collected could be spent on forming new companies (preventing monopolies) that would do the required R&D.
    Exxon/Mobil can make TRILLIONS in profits as far as I’m concerned. They pay their American employees well and have great benefits packages. Part time workers with an eighth grade education can make 50k yr. .
    The loopholes are what cause the problems.

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