The oil levy imposed in 1980 was called the "crude oil windfall profit tax" (WPT). Note the singular "profit," a useful reminder that this tax should never be confused with the "excess profits tax" imposed during World War I, World War II, and the Korean War. "The windfall profits tax has nothing to do, in fact, with profits," observed The Washington Post in 1979. "It is an excise tax -- that is, a tax on each barrel of oil produced."
In 1980 Congress enacted the WPT when it ended oil price controls. The controls were a remnant of President Richard Nixon's general wage and price freeze, implemented in 1971. While most of Nixon's price controls expired in 1973, Congress extended oil regulation through 1981. Worried over the rising cost of home heating oil as well as a general run-up in world petroleum prices, legislators decided to keep a lid on domestic oil prices.

From the start, opponents worked tirelessly to abolish oil price controls. Most plans for repeal included some sort of windfall profit tax, either as a sop to disaffected lawmakers or as part of a genuine effort to balance the scales of economic justice. In 1974 President Gerald Ford proposed such a compromise, and the Senate Finance Committee approved a version of the WPT in 1975. Ultimately, however, it fell to President Jimmy Carter to make the bargain stick. In April 1979 he introduced plans to lift price controls gradually over the subsequent 18-month period. In tandem, he offered a new tax on oil production. "Unless we tax the oil companies, they will reap huge and undeserved windfall profits," Carter declared in a nationwide address. Americans had a right to recapture some of that windfall and put it to good use. Carter suggested that the revenue be earmarked for mass transit, oil price relief for poor families, and the development of alternative energy sources.


Structure of the Tax

After considerable wrangling, Congress agreed, and on April 2, 1980, Carter signed the WPT into law (P.L. 96-223). Lawmakers had imposed an excise levy on domestic oil production, taxing the difference between the market price of oil and a predetermined base price. The base price was derived from 1979 oil prices, and it required annual adjustments for inflation and state severance taxes. (For an excellent description of the tax, its structure, and its legislative odyssey, see the fine postmortem published in 1990 by Salvatore Lazzari of the Congressional Research Service, Doc 90-6824 or 90 TNT 198-43 .)
Virtually all domestic oil production was subject to the tax. (Some types of oil were exempt, including any owned by state and local governments, qualified educational or charitable organizations, or some Indian tribes and individuals.) Every barrel of taxable oil was assigned to one of three categories. Those "tiers," which were derived from similar classifications in the oil price controls, were based on the age of the oil well, the type of oil produced, and the amount of daily production. Each tier had its own tax rate and its own base price. Tax burdens also varied according to the type of producer; independent companies paid a lower rate than major, integrated producers. Taken together, those various factors produced a range of rates from 15 percent to 70 percent.

The WPT was collected on the first sale of taxable oil, typically when a producer sold a barrel to a refiner. The refiner was required to withhold applicable tax from the payment to the producer and deposit the money semimonthly into an account. The purchaser filed quarterly returns reflecting those collections.

The WPT was explicitly designed to be temporary. While the legislation allowed for some flexibility, the tax was slated to disappear over a three-year period beginning sometime between 1988 and 1991, depending on revenue yields. As it happened, those yields would speed up the levy's disappearance.


Arguments For and Against

Supporters of the WPT believed that deregulation would deliver enormous profits into the greedy hands of a rapacious oil industry. Sound familiar?
In the late 1970s, oil prices were expected to increase dramatically once controls disappeared. Regulated prices were pegged as low as $6 per barrel, while global prices had climbed to almost $30. According to the Joint Committee on Taxation, lifting the price controls would produce $1 trillion in new revenue for oil producers between 1980 and 1990. Profits were expected to rise by more than $400 billion over the same period.

Many lawmakers considered such an increase wholly unjustified, especially since many Americans were already struggling with higher energy bills and occasional shortages. Prices had already climbed dramatically over the previous decade, a result of the OPEC oil embargo, the Iranian Revolution, and a continuing increase in demand. In the face of so much consumer pain, oil companies could not be allowed to pocket their enormous profits. Some sort of tax was necessary to stem the "immense transfer of cash" from consumers to oil companies, declared The New York Times. "Legislators who sit by idly while oil profits soar will have to answer to the voters," the editors warned.

Some advocates of the WPT believed that Americans had a right to share in oil company profits; when the nation's natural resources were exploited, some of the earnings belonged to the people. Advocates also contended that oil companies were shirking their fiscal responsibilities. The industry was blessed with low effective tax rates, largely as a result of two key preferences: the percentage depletion allowance and the expensing of intangible drilling costs. The WPT would help offset such unjustified -- and controversial -- subsidies.

Finally, noted CRS analyst Lazzari, budgetary pressures made any new revenue source very attractive. Between 1961 and 1979 the federal budget had run a deficit in every year but one. With preenactment revenue projections for the WPT running at roughly $225 billion for 1980 to 1991, money was a vital consideration.

Those arguments notwithstanding, the WPT had more than its share of opponents. Most notably, Ronald Reagan had attacked the WPT while campaigning for the presidency in 1980. Once in the White House, he consistently supported repeal. But in the face of a series of repeal attempts, the WPT stayed on the books. Even the Tax Reform Act of 1986 left the levy intact, despite Treasury support for repeal (and the bill's rollback of the industry's other tax preferences).

By 1988, though, opposition had grown to a fever pitch. The tax eventually succumbed to its own disappointing results. It had proven to be a heavy administrative burden, both for taxpayers and the IRS. Oil industry representatives claimed annual compliance costs of $40 million to $50 million. Press reports suggested the IRS was spending as much as $15 million to collect the tax. Overall, it was a heavy cross to bear, complained oil executives. In 1984 a General Accounting Office report called the WPT "perhaps the largest and most complex tax ever levied on a U.S. industry."

Worse, the tax had yielded less revenue than anticipated throughout its existence -- and none at all in its later years. Oil prices had failed to continue their dramatic rise; between 1980 and 1986, they had fallen from $30 to just $10 per barrel. Meanwhile, the WPT's "base price" -- used to calculate tax liability -- had continued to rise with inflation, as required by law. Squeezed from both sides of the equation, the tax had become a negligible source of revenue.

In its eight years of existence, the WPT raised $79 billion in revenue, the CRS later reported. But since those payments were deductible against income, affected companies enjoyed a lower burden under the regular corporate income tax, effectively reducing the net yield to about $40 billion -- a far cry from early hopes.

Meanwhile, domestic oil production had fallen to its lowest level in 20 years. While demand had continued to rise, domestic producers had fallen behind in the search for new oil reserves. As a result, the United States had increased its reliance on foreign oil supplies. According to the American Petroleum Institute, the United States had derived about 32 percent of its energy from foreign sources in 1983. By 1986 that figure had climbed to 38 percent. Some analysts expected the trend to continue, although not everyone believed that taxes were driving the dynamic.

WPT opponents complained loud and long about this burdensome but unproductive tax. "As long as the tax is not being collected, the accounting requirements are needless," complained former Democratic senator from Oklahoma David Boren in 1988. "They result in heavy burdens for the private sector and unnecessary cost to the taxpayer." Those arguments were particularly resonant as the oil industry struggled through one of its deepest slumps. Lawmakers from leading oil states were eager for repeal.

In August 1988 Congress agreed to repeal the tax. Few mourned its passing. "Time for the windfall tax to fall," declared its erstwhile champions at The New York Times. Events had overtaken the levy, as so often happens with narrow taxes designed to deal with transient phenomena. Did oil companies deserve to keep their windfall profits? "It was a resentful question when Americans waited two hours in gasoline lines and Saudi princes summered in Monaco," the Times recalled. "It seems almost quaint now."


by Joseph J. Thorndike

From "Historical Perspective: The Windfall Profit Tax -- Career of a Concept", found at: http://www.taxhistory.org/thp/readings.nsf/cf7c9c870b600b9585256df80075b9dd/edf8de04e58e4b14852570ba0048848b?OpenDocument