	Introduction

Over the past 13 years, the price of crude oil has generally been increasing and volatile. Five companies—ExxonMobil, Royal Dutch Shell, BP, Chevron, and ConocoPhillips—earned a predominant share of those profits. Numerous bills have been introduced in the Congress over this period to tax the oil and gas industry's record profits. In the case of the five major oil companies over this period, the increase in revenues was largely price-driven, with quantities of oil produced largely stagnant. While revenues increased by 86% from 2003 to 2008, net income increased by a greater percentage, on average 108%, except for ConocoPhillips, which can be considered as a special case in 2008. A type of windfall profits tax on domestic crude oil production was in effect from April 1980 to August 1988. There were two types of windfall profits tax bills in the 109 th Congress: those that would have imposed an excise tax on windfall profits based on the price of crude oil, and those that would have imposed an income tax on windfall profits based on either the existing tax law's definition of corporate taxable income or excessive rates of return. One goal of a WPT could be to tax profits that are price driven, or those that are not the result of additional output or investment. The following sections examine the possible output and price effects of the different types of WPT, and explore which type of WPT is more likely to minimize economic distortions. In economic terms, oil producers would likely view the tax as an increase in the marginal, or incremental, cost of domestic oil production—the marginal cost of producing every barrel of taxable crude oil would be higher by the amount of the excise tax. Oil Imports and Energy Independence

If the domestic supply of oil was reduced in response to an excise tax on domestically produced oil, the demand for imported oil and petroleum products would likely increase, unless some other policy would concomitantly reduce the demand for petroleum to offset a tax-induced reduced supply. A repeal of the § 199 deduction could apply to all oil and gas producers, as proposed in the President's FY2012 budget, or apply only to major integrated oil companies, as proposed in the Close Big Oil Tax Loopholes Act ( S. 940 ). Instead, the repeal can be viewed as a way of using the existing corporate income tax system to increase the tax burden on the oil industry, and recoup some of any potential windfall or excess profits in the form of corporate income taxes. The market price of crude oil and natural gas, or even of refined petroleum products, such as gasoline, would not be expected to increase very much, if at all, by such a change in the short-run. Possible Revenue Effects

A WPT on crude oil could generate sizeable revenues depending on the tax rate and the tax base.
Over the past 13 years, surging crude oil and petroleum product prices have increased oil and gas industry revenues and generated record profits, particularly for the top five major integrated companies, ExxonMobil, Royal Dutch Shell, BP, Chevron, and ConocoPhillips. These companies, which reported a predominant share of those profits, generated more than $104 billion in profit on nearly $1.8 trillion of revenues in 2008, before declining as a result of the recession and other factors. From 2003 to 2008, revenues increased by 86%; net income (profits) increased by 66%. Oil output by the five major companies over this time period declined by more than 7%, from 9.85 million to 9.12 million barrels per day. In 2010 the companies' oil production was 9.4 million barrels per day. Being largely price-driven, with no accompanying increase in output resulting from increased investment in exploration and production, some believe that a portion of the increased oil industry income over this period represents a windfall and unearned gain. A windfall income is not earned as a result of additional production effort on the part of the firms, but due primarily to record crude oil prices, which are set in the world oil marketplace.
Since the 109th Congress, numerous bills have been introduced seeking to impose a windfall profits tax (WPT) on oil. An excise-tax based WPT would tax only domestic production and, like the one in effect from 1980-1988, would increase marginal oil production costs. Theoretically, such a policy could reduce domestic oil supply, which could raise petroleum imports, making the United States more dependent on foreign oil, undermining goals of energy independence and energy security. By contrast, an income-tax based WPT would likely be more economically neutral (less economic distortion) in the short-run. Sizeable tax revenues could potentially be raised without reducing domestic oil supplies. Neither the excise-tax based nor income-tax based WPT are expected to have significant price effects. Neither tax would increase the price of crude oil, which means that refined petroleum product prices, such as pump prices for gasoline, would likely not increase.
In lieu of these two types of WPT, an administratively simple way of increasing the tax burden on the oil industry, and therefore recouping some of any excess or windfall profits, particularly from major integrated producers, would be to raise the effective corporate tax rate. One option would be repealing or reducing the domestic manufacturing activities deduction under IRC § 199. The 112th Congress voted on this measure as part of the Close Big Oil Tax Loopholes Act (S. 940). Going forward, in the context of deficit reduction, the 112th Congress may continue evaluating various methods for increasing taxes on the oil and gas industry to address concerns surrounding possible windfall profits.