'Windfall profit' tax move leaves reason for worry

Bob Tippee

The US oil and gas industry has reason to feel relief and worry about President-elect Barack Obama's decision not to pursue a "windfall profit" tax on oil.

The Obama transition team let it be known on Dec. 2 that it had dropped the proposal from consideration. Obama earlier saw it as a way to raise money to help energy users hurt by high prices.

Industry trade associations appropriately welcomed the decision. But they and the companies they represent must stay on guard.

That the idea of a windfall profit tax had any life at all speaks ominously about US energy politics.

It indicates failure to see the importance of future oil and gas supply, which can come only through investment, which requires profit, which taxation shrinks.

The mere mention of a windfall profit tax also shows an inability to learn from history.

Congress imposed a "windfall profit" tax in 1980. The levy discouraged US exploration and development, thereby limiting supply in subsequent years, and failed to meet its revenue targets.

And it didn't tax profits, "windfall" or otherwise. It taxed the difference between the sales price of oil at the wellhead and a statutory base price that proved monstrously difficult to administer.

The windfall profit tax of the 1980s was a huge, deceptively named mistake that no government should wish to repeat.

The Obama team shows no sign of having learned the lesson. It decided not to impose a windfall profit tax, said an aide, because the price of crude oil had fallen and seemed likely to stay below $80/bbl.

The implication is that if crude prices exceed $80/bbl again—which they will someday, quite possibly during the Obama presidency—a windfall profit tax will receive new consideration.

That's not good enough. It leaves a factor of uncertainty at work in planning for investments crucial to US energy supply—a price trigger for new taxation.

The Obama team would have done American energy users and taxpayers a favor by saying it no longer was considering a windfall profit tax on oil because it was a mistake ever to have done so.

(Online Dec. 5, 2008; author's e-mail:

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