Commentary
Consumers just got a reprieve from California Gov. Gavin Newsom’s proposed “windfall profits tax” on the oil companies. The Special Session of the Legislature scheduled for Dec. 5 to address the issue will likely not take action until January. That gives more time for consideration of how it really would be a tax on drivers, natural gas users, and others.
Fortunately, I recently received an analysis via email from Kayla Kitson of the California Budget & Policy Center, “Q&A: What Would a Windfall Profits Tax Mean for California?” She notes Gov. Gavin Newsom, in calling for the Special Session, also called the tax a “price gouging penalty.”
She explained (internal links in the original):
In general, a “windfall profits tax” or “excess profits tax” is intended to tax the portion of a corporation’s profits that exceed some specified “normal” level. Excess profits might represent advantages a corporation has due to market concentration and lack of competition or due to an external event like a war, natural disaster, or a pandemic — or a combination of these factors.But notice she doesn’t precisely define “exceed,” or “normal,” or “excess,” or “market concentration,” or “lack of competition.” These all are fuzzy concepts designed to give more power to government over free markets.
More, when such problems occur, government actually does have solutions already at hand. It can use antitrust, at the state as well as the federal levels, to break up “market concentrations.” And it can reduce government’s own immense regulatory excesses to encourage other companies to enter the market.
As to “pandemics” and “wars,” both of which we have experienced, market distortions are temporary and best are left to be sorted out by the market itself. Especially because COVID-19 largely has passed, and the Ukraine War likely won’t last long.
A man pumps gas in Irvine, Calif., on April 1, 2022. John Fredricks/The Epoch Times
The problem with any interference in the market, including windfall profits taxes, is it increases costs to the producer, who passes the cost on to consumers.
Kitson:
For example, during WWI, WWII, and the Korean War, the US put in place excess profits taxes that were intended to discourage some corporations, such as weapons manufacturers, from receiving outsized benefits due to war.Those were major wars the U.S. was involved in, the first two declared wars. Although the Ukraine War has the distorted prices of global energy, and the U.S. is aiding the government and military of Ukraine, technically our country is not at war.
Kitson:
In the 1980s, the U.S. instituted a “Crude Oil Windfall Profits Tax,” but it was not a true tax on excess profits. Instead, it was an excise tax on domestic oil production applied to the difference between the market price of a barrel of oil and a base price.True, and if you click on the link Kitson provided, you read in the Summary of the Congressional Research Service’s 2006 Report for Congress:
Dependence on imported oil grew from between 3% and 13%. The tax was repealed in 1988 because (1) it was an administrative burden to the Internal Revenue Service (IRS), (2) it was a compliance burden to the oil industry, (3) due to low oil prices, the tax was generating little or no revenues in 1987 and 1988, and (4) it made the United States more dependent on foreign oil. The depressed state of the U.S. oil industry after 1986 also contributed to the repeal decision.Kitson:
Governor Newsom has drawn attention to the fact that oil companies have seen record profits recently while many Californians are struggling with high gas prices. He has suggested that oil companies are using their market power to price-gouge Californians. To the extent that this is true, it may be sensible for policymakers to recapture some of the undue profits oil companies have made and return them to Californians.This really is just grandstanding by the governor in his quest for promotion to the Oval Office—which he recently has said he won’t undertake so long as President Biden is seeking a second term. It is not “sensible” to enact a tax that just will be passed on to consumers. The tax also will discourage oil and gas production in California. Oil companies have plenty of other places they can invest their money, both in America and around the world, to make the profits denied them in California.
There are other reasons for the high gas prices, beginning with the inflation President Biden and Congress caused by their wild spending of recent years.
Gas prices displayed in San Clemente, Calif., on June 7, 2022. John Fredricks/The Epoch Times
The state also mandates unique blends of gasoline used only here. When our rickety old refineries break down, shortages hit and prices rise, as they’re supposed to in markets, forcing conservation until the problems are fixed. In September, reported the Press Democrat, “Refinery maintenance along the West Coast is being blamed for the sudden spike in the cost of gas across California after weeks of downward trending prices.
“Shutdowns, or at the very least reduced production, have been reported at four California refineries, as well as at one in Washington, experts say.”
Kitson:
In general, it’s reasonable to tax excessive profits a corporation receives due to monopoly power or taking advantage of a crisis. Corporate profit margins have been at or near long-time highs, and not just for the energy sector. And corporate profits have accounted for a significantly larger share of price increases over the past few years compared to the average over the previous four decades, while many corporate executives have recently discussed on investor calls how they have benefited from keeping prices high.No, it’s not reasonable. And there’s no such thing as “excessive profits,” only profits that encourage more production. Again, if there are barriers to entry in a market, antitrust action and cutting regulations are the solutions.
Both the federal and state governments already tax profits. Raising taxes on profits in any way, especially through an “excess” profits tax, only would drive away even more businesses. California already is the highest-taxed state in the country. Voters just rejected Proposition 30, which would have raised taxes up to $5 billion on rich people. Ironically, Newsom opposed Prop. 30, but now wants to impose the equally counterproductive “excess” profits tax.
Kitson:
However, if policymakers choose to move forward with this proposal, they should be prudent when designing it to minimize unintended consequences that could harm Californians, such as reductions in supply leading to even higher prices.What? The California Legislature designing something “prudent”? At this point the discussion devolves into a Monty Python comedy sketch.
Views expressed in this article are opinions of the author and do not necessarily reflect the views of The Epoch Times.
