Windfall Tax Law
In 1980, the United States enacted the Crude Oil Windfall Profit Tax Act (P.L. 96-223) as part of a compromise between the Carter administration and Congress to remove crude oil price controls.  The law aimed to recover oil producers` revenues following the sharp rise in oil prices resulting from the OPEC oil embargo. According to the Congressional Research Service, the title of the law was a misnomer. “Despite its name, the tax on windfall profits of crude oil. was not a tax on profits. It was an excise tax. imposed on the difference between the market price of oil, technically called the withdrawal price, and a 1979 legal base price, adjusted quarterly for inflation and government severance pay.   According to The Economist magazine, windfall taxes are a bad idea for energy companies because energy markets go through boom and bust cycles – they say such taxes would discourage investment in times of expansion because companies fear the profits of investments made in times of crisis.  The rapid decline of PV installations between 2011 and 2013 created conditions for windfall profits due to the late reaction of regulators to the adjustment of feed-in tariffs. Regulators in Spain, Greece, Bulgaria and Romania have introduced retroactive incentive reductions.  An exceptional tax on solar energy was introduced in the Czech Republic and further measures against solar energy companies were considered in 2014.  In a recent speech to the UN General Assembly, Secretary-General António Guterres called on developed countries to take a stand against the climate crisis by taxing “windfall profits by fossil fuel companies.” In Sweden, hydropower is subject to a property tax and nuclear energy to a capacity-based tax.
Both taxes were increased in early 2008 due to higher windfall profits. Norway also levied an inheritance pension tax on hydropower plants from 2009, and Finland announced in 2009 its intention to tax nuclear and hydropower from 2010 or 2011.  Although windfall profits are taxed to encourage taxable businesses to lower their prices in favour of consumers, this may result in a reduction in investment, as the after-tax profit may not be worth it. In 2022, a windfall profits tax was levied on wind energy in Turkey.  Whether qualified as “exceptional” or “excess” profit taxes, these levies have a mixed historical record. While some have generated substantial and much-needed public revenue during national crises, others have been more concerned with political symbolism than economic efficiency. In short, they are not a panacea for economic and social problems. Understanding their promises and limitations can help mitigate potential challenges. For example, if a natural disaster leads to a spike in energy prices and therefore unusually high profits for energy companies, the government can introduce a windfall profits tax for industry in response. Mongolia introduced taxation of profits of mining companies operating in Mongolia in 2006.  A tax on unfused copper and gold concentrate produced in Mongolia was the highest windfall tax in the world.  The tax was abolished in 2009 and phased out over a two-year period.
The repeal of the 68% tax law was deemed essential to allow foreign mining companies to invest in mineral resource development in Mongolia.   A windfall income tax is a one-time surtax levied by a company or industry when economic conditions lead to large and unexpected profits. Inheritance tax and taxes levied on lottery winnings can also be considered windfall taxes on individual winnings. One of the reasons governments propose a windfall profits tax is to generate additional revenue. In some cases, a windfall profit tax is levied to encourage companies to lower prices in favour of the consumer, but may actually cause companies to reduce their investments. For example, from May 2018, the Indian government considered imposing a windfall tax on oil producers to reduce retail fuel and diesel prices. Under this regime, oil producers who receive international prices for oil they produce from domestic fields would have to divest themselves of any revenues they derive from prices above a certain threshold. Historically, windfall profits taxes have targeted oil and energy companies when costs have risen, especially due to war or other crises.
These taxes are designed to temporarily regulate the market they target in times of unusual volatility. A windfall profit tax is a tax levied by governments on certain industries when economic conditions allow those industries to make above-average profits. Windfall taxes are mainly levied on enterprises in the target industry that have benefited most from economic opportunities, mainly commodity-based enterprises. As with all tax initiatives launched by governments, there is always a gap between those who are for and those who are against the tax. The benefits of a windfall profits tax include revenues used directly by governments to strengthen funding for social programs. However, those who oppose windfall taxes claim that they reduce the initiatives of companies that make profits. They also believe that corporate profits should be reinvested to foster innovation, which benefits society as a whole. In the United Kingdom, an exceptional advance tax on certain bank deposits was levied as part of the 1981 budget under Margaret Thatcher. In 1997, Tony Blair`s government introduced a windfall tax on privatised public services. In 2022, Boris Johnson`s government announced a one-off tax on energy companies to fund a program to alleviate Britain`s cost-of-living crisis.  It was not only during the war that Congress levied such taxes. In 1980, the federal government under President Jimmy Carter enacted a windfall profits tax on the U.S.
oil industry in response to soaring gasoline prices and recent deregulation of the industry. The Crude Oil Windfall Benefits Tax Act was perhaps the worst measure of its kind. In fact, profits were not taxed. Rather, it was an excise duty levied on the difference between the prevailing market price for oil and a legally established adjusted strike price. Essentially, he taxed the rise in the price of oil. A windfall profit tax is a higher tax rate on profits resulting from a sudden and unexpected profit for a particular business or industry, often as a result of a geopolitical disruption, war, or natural disaster that causes unusual spikes in demand and/or supply disruptions. The historical experience of the United States with taxes on excess and windfall profits should therefore be seen as a cautionary tale. If these taxes are well designed and carefully implemented to encompass rent-seeking activities, they can be effective, as they were during the First World War, at least initially. In the past, taxes were levied on windfall profits as a result of opportunistic “price gouging” or “profiteers”, real or imagined. Notable examples of sudden and dramatic increases in oil industry profits that have caused such taxes around the world include the OPEC oil embargo of the 1970s, the Gulf Wars and global economic sanctions imposed on Russia, and the resulting oil and gas shortages in response to their invasion of Ukraine. Of course, there are many parallels between today and the experience of the First World War.
Today`s fossil fuel companies have benefited tremendously from current geopolitical conditions, especially the war in Ukraine, just as munitions manufacturers did during both world wars. In July, Exxon reported a record quarterly profit of nearly $18 billion, while Chevron reported its own record quarterly profit of more than $11 billion. Exceptional taxes can also apply to people who suddenly get rich by receiving a large sum of money through a donation, inheritance or game show, game or lottery winnings. In many cases, inheritances, gifts from family members or friends, and life insurance payments are tax-free for the beneficiary. Even those who believe that taxing extraordinary profits made under current crisis conditions is a desirable objective should recognize that, historically, such levies seem to work mainly in crisis situations such as those we are experiencing today. Their long-term longevity is hardly guaranteed. Such taxes may now offer some political and moral comfort, but they rarely deliver on their promise of more sustainable tax justice, ultimately dooming their permanence to failure. After the introduction of the World War II bill in 1940, Congress quickly passed a new version of the tax, but this time the political compromise allowed companies to choose the method they would use to measure their “excess” profits. Not surprisingly, the World War II Excess Profit Tax was not as effective as its predecessor. It brought in only about 25% of total war tax revenue, and it was also abolished shortly after the war, with little discussion of its permanence.
However, the idea of taxing excess profits remained. During World War II, President Franklin D. Roosevelt introduced a tax on surplus profits to combat war profiteers. “Our current state of emergency and a healthy sense of decency make it imperative that no new groups of war millionaires emerge in this country as a result of the fighting on board,” he said. “The American people will not appreciate the idea that an American citizen will become rich and fat in a situation of bloodshed, carnage and human suffering. As oil prices stabilized rapidly, revenues were well below expectations. The complexity of calculating the tax has made it a huge administrative burden for the IRS and potential taxpayers. And because the tax was levied primarily on domestic oil production, the law contributed to a growing reliance on foreign oil.