Windfall Profits Tax

In the last 6-9 months we've heard a lot about a "windfall profits tax" that a lot of democrats want to impose on large oil companies. As the public was paying nearly $4 for a gallon of gas, a lot of people shouted their approval of sticking it to Big Oil (translate, ExxonMobil) for pillaging the wallets of the common "Joe" at the pump. But, have you ever thought about the effect an additional tax would have on the price at the pump?

First, let's clear up exactly what the windfall profits tax (WPT) is. It's not actually a tax on profit margins at all. It's an excise tax on the difference between the market price of crude oil and a base price created by federal statute. It was originally enacted in 1980 (passed during Jimmy Carter's administration, but didn't take effect until the next year) to steal (there's no nicer term for it) profits oil companies were making due to crude oil price increases caused by the OPEC oil embargo. That's right...the federal government thought it was deplorable that a company would pull oil out of the ground and actually try to sell it for market price, even though that high market price was not created by the oil companies. Anyway, the tax was repealed in 1988 during Ronald Reagan's administration because it produced only about 20% of the federal tax revenue that was anticipated, and because the tax only affected domestically produced crude oil, and therefore increased dependence on foreign oil exports.

No legislation has been introduced to revive the tax since 1988. However, according to a Wall Street Journal article, in 2007, 51 senators voted to impose a 25% WPT on any oil companies whose profits grew by more than 10% in a single year. Can you figure out which political party most of these votes came from without me telling you? I'll give you a hint--it's the party that has made a platform out of redistributing wealth. To quote Senate democrat Dick Durbin, "The oil companies need to know that there is a limit on how much profit they can take in this economy." If comments like that don't scare you, you need to wake up and shake the cobwebs out of your brain!

So, back to the question...what effect would a WPT have on what consumers pay at the pump? Based upon what you hear in the mainstream media, these oil companies would be forced to pay this tax for making too much money, which would have a deterrent effect causing the price of a gallon of gas to go down. WRONG! An additional tax is an additional expense that gets passed on to the consumer just like every other expense.

Let's look at a simpler example that everyone should be familiar with--the state sales tax. When you go to a store and buy a shirt for $7.99, you actually pay (in Texas) $8.65 ($7.99 + 8.25% sales tax). What you may not understand is that the great state of Texas imposes the sales tax on SELLERS, not BUYERS. It's the seller that passes the cost of that tax onto you, the consumer. See how that works?

Now, back to oil companies. Quiz Time: The federal government imposes a tax on oil companies. Who do you think is going to pay that tax? That's right! You are.

See how simple these things are when you apply a little logic. Now, next time you hear a congressman (or woman) spouting off about imposing a windfall profits tax on big oil to protect you, send them an email or give them a call to let them know you're not as big of an idiot as they think you are.