Democrats Attempt to Revive Disastrous “Windfall Profit” Tax

Senator Sheldon Whitehouse (D-R.I.) and Representative Ro Khanna (D-Cal.) have revived their effort to pass the Big Oil Windfall Profits Tax Act (S. 4111), a 50% excise tax on oil produced or imported by large energy companies. It would increase energy costs for consumers, increase reliance on foreign oil, and has already been tried – with disastrous results.

At a time when gas prices are rising because of international conflict, Democrats reach for their most trusted tool: the bluntest instrument possible, guaranteed to produce the opposite of the desired effect.

The Whitehouse-Khanna legislation targets companies producing or importing at least 300,000 barrels per day and would impose a 50% tax on the difference between current oil prices and last year’s average. The revenue would supposedly be returned to consumers as quarterly rebates.

It would raise costs across the entire economy.

Companies don’t absorb taxes, they pass them through. A per-barrel excise tax raises marginal production costs, which flow directly into the price consumers pay at the pump.

A 2020 National Bureau of Economic Research paper found that 31% of the corporate tax rate is borne by consumers through higher prices. The remainder falls on labor in the form of lower wages and fewer jobs. Energy, which touches every sector of the economy, transmits those costs faster and more broadly than almost anything else.

In “return” for higher prices and lower employment across the entire economy, bill sponsors boast that single filers would receive roughly $216 annually and joint filers would receive roughly $324 annually under this plan. That phases out entirely for individuals earning over $75,000 and couples over $150,000. Thus, a substantial portion of working Americans who commute, heat their homes, and absorb energy costs in everything they buy get nothing back at all. Never mind that the check is the same whether you drive 50 miles a day or don’t own a car.

At $4.51 a gallon, a driver filling a 15-gallon tank twice a month spends roughly $1,623 on gas annually. The rebate covers a fraction of that, once a year, after the money has already left their wallet, routed through a federal trust fund, before landing in their bank account months later. Meanwhile, higher energy prices have already rippled through groceries, freight, and household goods – costs the rebate doesn’t touch.

Democrats’ version of “relief” always takes the same form: economy-wide costs collected immediately, benefits trickling back months later through a federal bureaucracy, to fewer people, for less than what was taken. Hard pass.

It would increase dependence on foreign oil.

The WPT only applies to domestic production, which structurally guarantees that it would shift supply away from American producers and toward foreign ones. When you raise the cost of producing oil at home without raising the cost of buying it from abroad, domestic output falls and imports fill the gap.

The timing of the Democrats’ proposal is especially reckless. The Iran conflict has already disrupted one-fifth of global petroleum supply by blocking the Strait of Hormuz. While global supply is constrained, American oil companies are among the few producers that aren’t directly subject to the chaos of Middle Eastern geopolitics. If anything, domestic production should be treated as a strategic asset more than ever. This is precisely the wrong time to discourage domestic output.

It already failed. Democrats repealed it themselves.

In 1980, President Jimmy Carter signed the Crude Oil Windfall Profits Tax Act, which imposed a 70% excise tax on the amount of an oil sale price exceeding $12.81 per barrel ($43.71 in 2022 dollars), according to the Tax Foundation.

The tax was projected to raise $393 billion. Instead, it generated roughly $80 billion – 80% less than forecast.

The Congressional Research Service found that Carter’s windfall profits tax on the oil industry reduced domestic oil production by as much as 8% and caused U.S. dependence on imported oil to increase by as much as 13% from 1980-1988. Companies couldn’t pass along higher costs to buyers who could simply switch to cheaper, foreign crude. They just produced less. It took until 2020 for the U.S. to become a net petroleum exporter.

The results were so bad (and undeniable) that the tax was repealed in 1988 with a Democrat-led House and Senate.

The “windfall profit” tax raises costs, increases dependence on foreign oil, and has already failed catastrophically when tried. This bill simply rebrands an old, demonstrably bad idea. Lawmakers should reject it.