- Paul Constant is a writer at Civic Ventures and the cohost of the "Pitchfork Economics" podcast.
- He spoke with California Democratic Congressman Ro Khanna about the Big Oil Windfall Profits Tax.
- The proposed tax on Big Oil producers would be used for rebate checks for lower- and middle-class Americans.
While you might expect the entire economy to suffer under heightened inflation, corporations reported some of the biggest profits on record in 2021, when the inflation rate reached the highest it's been in nearly 40 years.
Our understanding of how economics works suggests that if corporations are paying more for materials thanks to a pandemic-ravaged global supply chain, their profits should be smaller. Instead, corporations are using inflation panic as a cover to raise prices and increase their profits even more.
According to analysis from the Economic Policy Institute, nearly 54% of the recent inflationary price hikes that Americans are paying have gone toward corporate profits. And people have started to notice: In February, a poll from Data for Progress showed that 63% of respondents have come to the conclusion that "large corporations are taking advantage of the pandemic to raise prices unfairly on consumers and increase profits."
Leaders like Senator Elizabeth Warren and California Democratic Congressman Ro Khanna have zeroed in particularly on the oil and gas industry as an especially egregious example of corporate price-gouging. Congressman Khanna recently joined the "Pitchfork Economics" podcast to discuss the Big Oil Windfall Profits Tax, a piece of legislation he helped introduce in March, which would address that disparity between gas prices and gas company profits.
Around the country, Americans are paying record-high prices at the gas pump, and Big Oil is raking in the profits. And even though ExxonMobil lost $3.4 billion in the first quarter of the year after ceasing operations in Russia in response to Russia's invasion of Ukraine, the corporation still doubled its first-quarter profits from last year, to $5.5 billion. Chevron, which in its recent quarterly report claimed to suffer less of an economic impact from the Russian invasion than its peers, is making its highest profits in at least a decade.
Under the Big Oil Windfall Profits Tax, large oil companies (those that import or produce more than 300,000 barrels of oil per day) will pay a 50% per-barrel tax on the difference between the current selling price and the average pre-pandemic price of oil — so essentially, a tax on their markups. By averaging the price-per-barrel between the years of 2015 and 2019, the tax would kick in for every penny over $66 per barrel. (At the time of this writing, oil stands at $110 per barrel.)
The 300,000-barrel threshold directly targets the biggest multinational oil producers — Exxon Mobil, BP, and the other handful of firms that have raked in tens of billions of dollars this year — leaving small domestic oil companies, which produce about 70% of the nation's oil, exempt from the tax.
Revenue collected from the Big Oil Windfall Profits Tax would then be directed back to lower- and middle-class Americans in the form of a quarterly tax rebate check. Khanna estimated that if Big Oil companies sold their product at $100 per barrel, the revenue raised would work out to a $300 quarterly check to every American household earning less than $150,000.
"There are a lot of middle class and working class folks who are hurting, and for whom a couple hundred bucks a month would make a big, big difference," Khanna said.
There's also a precedent for this type of tax on major oil companies. In April 1980, the Carter Administration enacted the Crude Oil Windfall Profit Tax, which created an excise tax on domestic oil production and pulled in $80 billion in gross revenue before it was repealed in 1988.
The legislation cosponsored by Khanna differs from the Crude Oil Windfall Profit Tax in several important ways. While the revenue from the new proposed tax would provide for rebate checks, the 1980 legislation allocated revenue for tax reductions, low-income assistance programs, and transportation projects.
Perhaps most importantly, the new legislation doesn't only apply to domestically produced oil like the 1980 tax did, which some critics say penalized domestic oil producers and enriched international oil companies. The Congressional Research Service in 2011 found that a plan (like Khanna's) that was tied directly to the profits of the largest companies in the world would create "less economic distortion" than the 1980's tax "without reducing domestic oil supplies."
The new Big Oil Windfall Profits Tax legislation has been criticized by the usual antitax organizations, but could prove popular among ordinary Americans, with one poll showing that 87% of likely voters favor "a crackdown on price gouging by oil companies."
That disgust at Big Oil makes sense to Khanna. "I think that what's offensive here is that Big Oil is making money while everyone else in America is willing to sacrifice to stand with the Ukrainians," he said.
When everyone pays a higher price in order to support Ukrainian freedom, Americans are willing to carry that burden. But when Big Oil overcompensates for their losses by raking in hefty profits at the expense of the rest of the country paying more at the gas pump, populist solutions, like the Big Oil Windfall Profits Tax, gain support.