As Energy Prices Skyrocket, Congress Must Return the Oil and Gas Industry’s Windfall Profits to the American People

Congress should enact a temporary tax on windfall profits from the oil and gas companies that are raking in record profits at a time of crisis-level energy prices. The industry should feel America’s pain at the pump as a motivation to lower costs—not an invitation to increase profits.

Although U.S. domestic oil production more than doubled since 2008, the price of oil continues to be set on a global market, which is vulnerable to the disruption of foreign petrostate dictators. As Russia invaded Ukraine last month, the average price of a gallon of gasoline jumped 50 cents in just two weeks. President Joe Biden has helped rally allies to isolate the Putin regime, including by suspending the import of Russian crude oil into the United States. This amounts to less than 4 percent of U.S. oil supplies but this suspension undermines a core pillar of the Russian economy—its fossil fuel exports.

Although the crisis in Europe does not raise domestic oil production costs, it has raised crude oil prices, and oil companies stand to profit on the difference. This comes at a time when oil companies were already reporting record-high profit levels. Last year, four fossil fuel multinational giants—ExxonMobil, Shell, Chevron, and BP—earned more than $75 billion in a single year in profits. Crude oil prices are now up 50 percent higher than their average daily price last year.

It’s no surprise that, in recent polling, more than 80 percent of voters favor “placing a windfall profits tax on the extra profits oil companies are making from the higher gasoline prices they are charging because of the Russia-Ukraine situation.”

Ultimately, the solution for real energy independence and climate security is to build a clean energy economy, which will cut U.S. spending on oil by up to one-quarter this decade. In the interim, Congress should not allow oil companies to reap windfall profits during a crisis at the expense of the American people.

How this policy would work

Congress should impose a windfall tax on oil company profits. There are many effective approaches that would ensure such a tax is borne by shareholders—the lion’s share of whom are wealthy individuals and foreign investors—rather than consumers. Taxing windfall profits would align the oil companies’ interests with the public’s need for lower prices.

This piece recommends an approach for setting a windfall profits tax that will rise and fall with the fluctuation of crude oil prices until they return to precrisis levels. This approach temporarily raises the tax rates paid by oil companies on their profits during the period that oil prices are at elevated levels.

By taxing only profits and not operating costs or investment expenditures, this approach does not increase the marginal costs of producing fuel, which might then be passed on to consumers under some circumstances. Instead, firms will continue to maximize the (now smaller) share of profits they may still retain, without any new production costs to pass along to consumers. To the degree that there is price fixing in the fuels market—an issue that deserves investigation—this measure will push any market manipulators to favor lower prices in order to terminate the new tax.

Since this is a temporary tax, it would have limited influence on the long-term expectations of return on profit for investors, meaning that it would not be expected to alter long-term investment decisions. In the short-term, it may even increase investment incentives by allowing oil companies to deduct all exploration and production expenses that lead to oil production this year.

The proposed design

In designing a windfall profits tax, Congress needs to determine what measure of income or revenues should be taxed, at what rate, and for how long, as well as which companies should be subject to the tax. As described below, this paper proposes to tax all large oil companies on a measure of profits that is more comprehensive than the current loophole-ridden definition of taxable income, at a rate that depends on the average price of oil over the course of the year, until the year in which prices return to precrisis levels.

First, because oil companies benefit from several implicit and explicit tax preferences, their taxable income is typically much less than their actual profits. Congress should consider basing the windfall profits tax on the broader measure of profits—or net income—that companies report to shareholders. This measure of profits already subtracts operating costs, but to further incentivize immediate investments, Congress should consider allowing companies to deduct any current year expenditures on new production that lead to oil production this year, without having to capitalize such expenses over the useful life of the investment.

Second, this piece proposes to set the rate of the windfall profits tax by a formula that rises or falls in proportion to the change in fuel prices. As prices increase, the tax rate should increase, approaching but never reaching the limit of taxing all profits. In the other direction, the tax rate should fall as prices fall, phasing out entirely once prices return to a precrisis benchmark.

Crude oil prices have jumped dramatically since the last full week of February 2022, when Putin invaded Ukraine. This was a massive disruption of international oil markets, which has not raised domestic oil production costs but has raised domestic oil prices. The authors propose a benchmark price of $75 per barrel of oil—West Texas Intermediate—which is the average daily price in calendar year 2021, preceding the run-up to the invasion. Notably, this benchmark already represents some of the highest prices in more than eight years. Congress could reasonably consider setting a lower benchmark at the pre-COVID-19 five-year average of $58 per barrel from 2017 to 2021.

Table 1 presents one set of proposed tax rates, which vary depending on average daily price in crude oil over the course of the full calendar year. At current crude oil prices of approximately $100 per barrel—if they persist for the remainder of the year—this equates to a tax rate of 50 percent. This would rise to just above 75 percent if the average price of oil were to reach $175 per barrel. The rate would return to zero once the price of oil returns to normal levels.

Table 1

This analysis focuses on crude oil because its deep integration in global markets has left its price most exposed to disruption from the current war. Other fossil fuel prices are also high—natural gas prices are up 170 percent since their pre-COVID-19 monthly average from January 2020, for example—and lawmakers could apply a similar windfall profits tax to other industries where excess profits are the result of crisis.

To determine which oil companies are subject to the tax, Congress should set a threshold based on a company’s quantity of crude oil imported or produced domestically such that the largest companies representing the supermajority of U.S. oil supplies are subject to this windfall tax. This threshold should apply to any sufficiently large oil company, regardless of ownership structure, whether a publicly traded corporation like Exxon Mobil or a privately held conglomerate like Koch Industries that imports oil from tar sands in Alberta.

For holding companies with diverse revenue sources, Congress may consider setting the proportion of profits subject to the windfall tax equal to the share of the company’s total revenues that derive from transactions involving crude oil or its products. Alternatively, Congress may choose to apply the tax to subsidiary companies. However, in this case, Congress should make sure that companies of any size are subject to the tax if their holding company meets the threshold for crude oil quantities.

Beyond the windfall tax, Congress should also eliminate permanent tax code subsidies for large oil companies. Congress should also repeal the “last in, first out” (LIFO) tax accounting method for oil companies, which artificially deflates their taxable income especially at times of rising prices. Oil companies are the largest beneficiary of the LIFO accounting method, which is essentially an accounting fiction that bears little resemblance to their actual turnover of inventory. It is simply a way for them to defer taxes on profits. Several major tax reform proposals from leading bipartisan members of Congress proposed repealing LIFO or requiring large oil companies to revalue their LIFO inventories. Congress should also end tax breaks for overseas oil production: It should repeal the exemption from the United States’ overseas minimum tax—known as the global intangible low-tax income (GILTI) regime—for foreign fossil fuel extraction and related income. And it should end the ability of oil companies to claim foreign tax credits for disguised royalty payments to foreign governments.

Projected revenues

The proposed windfall profits tax is intended to scale and eventually terminate based on price fluctuations, so the revenues it raises would vary substantially under different circumstances. However, an examination of the revenues and taxes paid by 10 large public oil companies offers a basis for a rough approximation.

If prices persist at their current elevated levels throughout the year—and if the proportion of oil company profits to crude oil prices are similar to last year’s proportions—roughly $15 to $25 billion would be raised by the windfall profits tax on just 10 of the largest oil companies.

Based on yet-to-be published estimates prepared by the Institute on Taxation and Economic Policy—generously shared with the authors—10 large oil companies in 2021 are estimated to have earned $43 billion in pretax profits in the United States, of which 2 percent was paid in taxes to state governments and 5 percent was paid in taxes to the federal government. This leaves $40 billion in after-tax profits. This includes profits from Chevron, ExxonMobil, ConocoPhillips, EOG Resources, Devon Energy, Pioneer Natural Resources, Occidental Petroleum, Phillips 66, Valero Energy, and Marathon Oil.

It is important to note that these profit rates were high, even preceding the current crisis. In 2018, as average crude oil prices dropped from $65 per barrel in 2018 to $57 in 2019, the after-tax profits for these 10 oil companies (and their predecessor companies) dropped from $30 billion to $7 billion. In 2020, due to COVID demand disruptions, oil prices dropped further to an average of $39 per barrel and profits turned to $61 billion in losses. However, as demand returned in 2021, prices rose to $68 and profits surged to $40 billion. As crude oil prices fluctuate, so do oil company profits.

As of March 2022, crude oil prices reached more than $100 per barrel, more than one-third higher than last year’s average. If oil company earnings were also to rise by one-third this year, that would imply more than $50 billion in after-tax profits for this set of companies. Wall Street analysts are forecasting an even greater increase in earnings this year: For example, MarketWatch is—at the time of publication—projecting a 60 percent increase in annual earnings for ExxonMobil, 58 percent for Chevron, and 85 percent for ConocoPhillips.

If prices were to remain at their current levels for the rest of this year, the proposal would tax half of otherwise untaxed profits. At last year’s profit levels, that would raise roughly $20 billion. If profit levels this year rise to match the elevated oil prices and rise by one-third, the tax would raise more than $25 billion.

What to do with the revenues

One of the main objectives of this policy is to align the oil industry’s interests in maximizing profits with the public’s interest in stabilizing gas prices. However, it would also raise significant revenues for as long as fuel prices remain high, allowing Congress to alleviate household budget pressures in the immediate term through targeted supports, potentially including a combination of cash payments, commuter benefits programs, transit service vouchers, or other approaches.

In 2020 and 2021, Congress sent three economic impact payments to American households: The most recent round reached more than 160 million households, with all but the highest-income Americans eligible. Thus, the Internal Revenue Service (IRS) already has the infrastructure needed to quickly distribute cash relief into the pockets of American families who are struggling with the direct and indirect costs of high gas prices. If the windfall profits tax raises $25 billion in revenue and Congress dedicated it all to automatic direct payments in a similar manner as the recent pandemic economic impact payments, a family of four would receive about $340.

Notably, the amount of revenues contemplated here vastly exceed the total cost of offering every person in America up to $12,500 toward the purchase of an electric vehicle, which the Joint Committee on Taxation estimated would cost less than $1 billion per year on average over the next decade.

Complementary policies

A windfall profits tax is an important policy to rein in oil company profiteering and help provide consumer relief, but it is not the only policy needed in response to excessive corporate profits, the energy crisis in the United States and in Europe, and the need to transition to clean energy.

CAP has recently published recommendations to make Putin pay for the invasion of Ukraine; provide additional consumer relief; enact “use or lose” policies for fossil fuel leases and permits on public lands; stabilize state revenues; and support U.S. allies, for example.

Several other important, interacting policies are described below.

Ending the tax preference for corporate stock buybacks

Oil companies are distributing their windfall profits to shareholders through record levels of corporate stock buybacks, following the recent trend in recent years across corporate America. Stock buybacks enjoy preferential tax treatment in several ways. Sens. Sherrod Brown (D-OH) and Ron Wyden (D-OR) recently proposed leveling this tax treatment by implementing a low-rate excise tax on the amounts that companies spend to buy back their shares. A version of their proposal—included in the House-passed budget reconciliation bill—is estimated to raise $124 billion in revenue over 10 years.

Reversing the 2017 giveaways to corporations and wealthy business owners generally

As Congress contemplates windfall profits taxes, it should remember that corporations and wealthy business owners received a massive windfall tax cut in 2017 from the Tax Cuts and Jobs Act (TCJA) signed by then-President Donald Trump. The regular corporate rate was slashed by 14 percentage points, and passthrough business owners were awarded a special new deduction that effectively cut the tax rates on much of their income by one-fifth, translating into a reduction in the effective top tax rate of 10 percentage points. While TCJA included revenue-raising provisions, they only partially offset the tax cut windfalls. The long-term solution is to strengthen the corporate tax, which is already mostly a tax on “excessprofits—albeit a far weaker one than it used to be—and to repeal the passthrough deduction.

Clean energy investments

Despite decades of investment in oil and gas production—and even though U.S. crude oil production has more than doubled since 2008—U.S. oil prices are set on a world market and remain vulnerable to the actions of foreign petrostate dictators. As stated in a recent CAP piece, the United States cannot drill its way to energy independence.

However, the climate investments proposed in President Biden’s economic agenda offer a path to real energy independence by building a clean energy economy. In legislation that has already passed the House, these investments include incentives for the purchase of electric vehicles, domestic battery production, the deployment of clean electricity, and more.

As recent analysis from Energy Innovation found “the provisions included in Biden’s economic agenda would cut U.S. oil demand by about half of what we import from Russia within 36 months, fully by 2027, and by more than double by 2030, almost all from vehicle electrification.” Within the decade, clean energy investments and standards could cut total U.S. total spending on oil by up to 24 percent, according to analysis by the Rhodium Group.

Clean energy not only offers greater energy security for the country, it offers greater financial security to households. Because clean energy is less expensive than fossil fuels, investments and standards to accelerate the adoption of clean energy would begin saving households right away and in every region of the country. All told, the clean energy provisions of President Biden’s economic agenda could save the average U.S. household $500 per year in reduced energy costs by the end of the decade.


A surtax on the windfall profits that oil companies are making at the expense of the American public during a crisis that has raised global fuel prices will ensure fairness, protect consumers, and align industry incentives with the goal of lowering prices. It will also raise revenues that can be used to defray household costs and support long-lasting reductions in oil dependence.

In contrast with the flawed excise tax on domestic production that Congress enacted four decades ago, Congress today has an opportunity to design a properly targeted tax on profits that accommodates near-term and long-term investment, adds nothing to the marginal cost of production, and affects shareholder returns but not consumer costs.

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