Amendments to the Windfall Profit Tax

The WPT was amended many times after it was enacted in 1980. 3). 3 on April 27. (7) 

	Structure of the Tax

Despite its name, the crude oil windfall profit tax was not a tax on profits. Cumulative net revenues, which totaled about $43 billion between 1980 and 1987, fell farshort of the $227.3 billion target. Finally, while the tax was called a "profit" tax, it was not really a profit tax but rather aspecial type of excise tax -- a selective excise tax on oil producers. Table 3 also shows that, for the same period, actual gross revenues were about $80 billion,significantly short of projections -- 80% less than the projected amount of $393 billion -- but stilla sizeable sum. The result was two forcesacting to reduce the tax base -- the so-called "windfall profit." Column (3) shows estimated foregone payments ofincome taxes -- reduced income tax collections -- due to the deductibility of the WPT against theincome tax liability as a cost of production. The remaining revenue losses were due to receipts from federalinterests (column [2]). less import dependent. And further, while a WPT made the U.S. more dependent on importedoil, decontrol and a WPT made the U.S. less dependent than controls without WPT. The magnitude by which the WPTreduced domestic oil supplies and increased imports depends on two variables: (1) the magnitudeof the decline in the supply price of domestic crude oil (the amount of the WPT), which determinesthe after-tax price received by oil producers; and (2) the price elasticity of the supply curve, whichdetermines the reduction in oil production in response to the lower price (net of the WPT) receivedby oil producers. Over the entire 1980-1986 period, it is estimated that, depending on the assumed supply curveprice elasticity, the WPT reduced domestic oil production from between 320 million barrels (1.2%of domestic production) and 1,268 million barrels (4.8% of domestic production). The effect ofreducing domestic oil production was to increase the level of imported oil. industry." It was a compliance burden to the oil-producingindustry and an administrative burden for the Internal Revenue Service even though,after FY1986, the tax generated little or no tax revenues. Finally, the domestic U.S. oil industry was experiencing difficult economicconditions due to the collapse of oil prices in 1986. (51) Between1982 and 1988, this industry lost about one-third of its jobs. Also, thetax would be imposed on the windfall profit from and natural gas (and productsthereof). Thus, even without a windfall profit tax governmenttax revenues would increase commensurate with any oil industry windfall. Economic Implications. Alternative Policy Options

If, instead, an excise tax were to be imposed broadly on both imported as wellas domestically produced oil (as proposed in the early 1980s by the ReaganAdministration) much greater price effects would be expected -- the price of crudeoil in the United States would tend to be much higher than under the WPT ondomestic oil alone. Inthis case, the tax would both increase the marginal costs of oil imports (an upwardshift in the oil import supply schedule) and cause a slight movement along theschedule due to increased demand for oil imports, and thus have a bigger price effect. (60) 
From an economic perspective, the only tax that would be relatively neutralin the short run -- that would have no (or few) price effects and other economiceffects -- would be a pure corporate profits tax, since this tax does not affectmarginal production costs, and cannot be shifted in the short run. Thus, to the extentthat a surtax on the corporate income of crude oil producers on their upstreamoperations could approximate such a tax, this would not raise crude oil prices andwould not increase petroleum imports in the short run . Technical Appendix

The algebraic formula for the WPT liability is as follows:
T t = Ï [P t m - P t b (1+ Ï t-2 )](1- s ) (1- c ) 
where
T t = the WPT in $/barrel, in time t (e.g., in the 1st quarter of any year),
Ï = the WPT tax rate in percent (see Table 2 in the text),
P t m = the market (removal) price of domestic crude oil at the wellhead at time t,
P t b = the base price corresponding to the type of oil produced, as specified by law (see Table 2 )
Ï = rate of inflation, as measured by the GNP deflator, so that Ï t-2 is the GNP deflatorlagged two quarters, (61) 
s = the rate of State severance tax, if any
c = the rate of federal corporate income tax
In April 1980, the federal government enacted the crude oil windfall profit tax on the U.S.oil industry. The main purpose of the tax was to recoup for the federal government much of therevenue that would have otherwise gone to the oil industry as a result of the decontrol of oil prices. Supporters of the tax viewed this revenue as an unearned and unanticipated windfall caused by highoil prices, which were determined by the OPEC (Organization of Petroleum Exporting Countries)cartel.
Despite its name, the windfall profit tax (WPT) was actually an excise tax, not a profits tax,imposed on the difference between the market price of oil and an adjusted base price. While mostdomestically produced oil was subject to the tax (about 2/3 in 1985), the remaining 1/3 that wastax-exempt was significant (1.3 billion barrels in 1985, or 360,000 barrels per day). The $80 billionin gross revenues generated by the WPT between 1980 and 1988 was significantly less than the $393billion projected. Due to the deductibility of the WPT against the income tax, cumulative net WPTrevenues were about $38 billion, significantly less than the $175 billion projected. This reportpresents estimates of the amount of foregone oil production from 1980-1986 due to the WPT underthree alternative supply price responses, reflecting three different assumptions about the priceelasticity of the domestic oil supply function, a critical factor (statistic) in estimating lost oil outputand increased import dependence. From 1980 to 1988, the WPT may have reduced domestic oilproduction anywhere from 1.2% to 8.0% (320 to 1,269 million barrels). Dependence on importedoil grew from between 3% and 13%. The tax was repealed in 1988 because (1) it was anadministrative burden to the Internal Revenue Service (IRS), (2) it was a compliance burden to theoil industry, (3) due to low oil prices, the tax was generating little or no revenues in 1987 and 1988,and (4) it made the United States more dependent on foreign oil. The depressed state of the U.S. oilindustry after 1986 also contributed to the repeal decision.
Reinstating the windfall profit tax would reduce recent oil industry windfalls due to highcrude and petroleum prices but could have several adverse economic effects. If imposed as an excisetax, the WPT would increase marginal production costs and be expected to reduce domestic oilproduction and increase the level of oil imports, which today is at nearly 60% of demand. Crudeprices would not tend to increase. Some have proposed an excise tax on both domestically producedand imported oil as a way of mitigating the negative effects on petroleum import dependence. Sucha broad-based WPT would tend to reduce import dependence, but it would lead to higher crude oilprices and likely to oil industry profits, potentially undermining its original goals. Because the purecorporate profits tax is relatively neutral in the short run -- few, if any, price and output effects occurbecause marginal production costs are unchanged in the short run -- a possible option would be acorporate income surtax on the upstream operations of crude oil producers. Such a tax that wouldrecoup any recent windfalls with less adverse economic effects; imports would not increase becausedomestic production would remain unchanged. In the long run, such a tax is a tax on capital; itreduces the rate of return, thus reducing the supply of capital to the oil industry.