how windfall taxes work
oil and gas companies are common targets of windfall taxes the massive net income increase for oil and natural gas producers the international energy agency estimates they will double from 2021 to 2022 hitting an unprecedented 2 trillion is the current trigger for the discussion and recent imposition of windfall taxes for example on september 30 2022 the council of the european union agreed to impose a temporary solidarity contribution on businesses in the crude petroleum natural gas coal and refinery sectors on profits that are above a 20 increase of of the average yearly taxable profits since 2018 this is on top of whatever taxes they already owe in their individual countries in each member state proceeds are to help households and companies and to ease the effects of high electricity prices and in october 2022 president biden threatened that he would seek a windfall profits tax on oil and gas companies which have reported very high profits and continue to charge high prices he told them to use their outrageous bonanza the effect of the ukraine war to expand oil supplies or reduce consumer prices the windfall tax debateas with all tax initiatives instituted by governments there is always a divide between those who are for and those who are against the tax the benefits of a windfall tax include proceeds being directly used by governments to bolster funding for social programs those against windfall taxes claim that they reduce companies initiatives to seek out profits they also believe that profits should be reinvested by companies to promote innovation that will in turn benefit society as a whole then there is the question of whether windfall taxes actually raise the amounts that are predicted consider the most recent example in the u s the crude oil windfall profit tax of 1980 imposed by congress during president jimmy carter s administration according to a 2006 report from the congressional research service the windfall profits tax wpt generated 80 billion in gross revenues between 1980 and 1988 significantly less than the 393 billion projected due to the deductibility of the wpt against the income tax cumulative net wpt revenues were about 38 billion significantly less than the 175 billion projected in a more current example the washington post reports that the windfall tax in italy had as of september 2022 yielded only about one fifth the income the government had hoped for on the other hand the taxes do yield revenue that would not otherwise be available to offset the societal costs of high prices critics point to other possible negative consequences while windfall profits are taxed to encourage the taxed entities to lower their prices for the benefit of consumers the tax could end up reducing investment because the new tax could make the after tax profit not worth the effort this happened with the 1980 tax according to the congressional research service report it notes that from 1980 to 1988 the wpt may have reduced domestic oil production anywhere from 1 2 to 8 0 320 to 1 269 million barrels dependence on imported oil grew from between 3 and 13 the tax was repealed in 1988 windfall taxes on individualswindfall taxes may also apply to individuals who gain sudden riches from receiving a significant sum of money through a gift inheritance or through game show gambling or lottery winnings in many cases inheritances gifts from family members or friends and life insurance payouts are tax free to the recipient however federal state or local taxes may be owed by the giver or by the estate from which the inheritance is received any wealth gained from playing the lottery or gambling is considered taxable income these winnings are fully taxable and must be reported to the internal revenue service irs by filing the individual tax return an individual who is awarded a sizeable monetary settlement after winning a lawsuit is likely to owe federal tax on the amount received while certain settlements such as damages for personal physical injuries or physical sickness are considered non taxable by the irs most other types of damages are taxed as ordinary income who has to pay a windfall tax companies and industrial sectors that can be subject to windfall taxes are those with massive increases in profits generally due to situations such as wartime commodities shortages and other situations and events that drive up prices individuals may also be taxed on windfalls such as those from inheritances or lottery winnings who benefits from revenue raised by windfall taxes taxes are imposed by governments and can be used for a variety of purposes during world war i and world war ii windfall profit tax revenue went to support the war effort the 1980 taxes added to general government funds revenue from the new eu council 2022 tax is to be used to provide financial support to households and companies and to mitigate the effects of high retail electricity prices 