Not How It Works: Some Democrats Continue to Think Higher Taxes Will Solve Rising Energy Prices
A top Democratic senator wants to increase taxes on American oil companies despite gasoline prices recently hitting a record high of $5 per gallon.
It continues the mixed messages from President Biden, top administration officials, and congressional Democrats who have all vowed to bring down prices at the pump but are proposing policies that would only make energy more expensive.
The latest comes from Sen. Ron Wyden (D-Ore.), the Chairman of the Senate Finance Committee, who is proposing to double the tax rate on major oil companies, as Bloomberg reports:
“The proposal by Senator Ron Wyden, an Oregon Democrat who chairs the tax-writing Finance Committee, would mean oil companies face federal taxes of as much as 42 percent on profits considered excessive – the 21 percent US corporate tax rate plus a new 21 percent surtax, according to two people briefed on the proposal.” (emphasis added)
After Wyden floated his energy tax hike, top White House officials were quick to respond, as Bloomberg noted:
“‘We’re not ruling that out of consideration. We’ve made that clear,’ Bharat Ramamurti, deputy director of the National Economic Council, told Bloomberg TV’s ‘Balance of Power with David Westin’ with regard to the proposal.” (emphasis added)
A Failure To Understand Market Forces
Wyden’s proposed tax increase is built as an attack on the earnings of oil companies as crude oil prices remain at their highest level in nearly a decade and gasoline prices have hit never before seen highs. But this is a failure to understand the market forces in the energy sector. As Energy In Depth (and numerous others) recently pointed out in a response to Transportation Secretary Pete Buttigieg, oil companies do not set the price of oil. As the Energy Information Administration explains:
“Crude oil prices are determined by global supply and demand.”
Furthermore, oil companies don’t even own the vast majority of gasoline stations, and those stations are selling gasoline based on market factors, as EIA states:
“Gasoline prices tend to increase when the available supply of gasoline decreases relative to real or expected gasoline demand or consumption.”
It’s why American oil companies can’t control the price of oil when the price hits a record high or a record low as it did in 2020 when the industry faced massive losses. As Robert Rapier, a Forbes contributor recently noted:
“What people get wrong is that ExxonMobil doesn’t have any control over this. In 2020, ExxonMobil had to sell oil for less than it cost to produce it. They are at the mercy of the markets, which is why they lost $22.4 billion in 2020.”
Tax Increases Will Make the Problem Worse
So, would Wyden’s tax on the earnings of oil companies actually be a solution to high gasoline prices?
History tells us absolutely not.
In 1980, President Jimmy Carter and Congress passed a windfall profits tax that only served to undermine domestic energy production. A Congressional Research Service report on the tax found:
“From 1980 to 1988, the WPT may have reduced domestic oil production anywhere from 1.2 percent to 8.0 percent (320 to 1,269 million barrels). Dependence on imported oil grew from between 3 percent and 13 percent.”
Economic experts have also criticized tax increases during an energy crisis, including Austan Goolsbee, former Chairman of the Council of Economic Advisors under President Obama, who argued back in March that it would make the problem worse:
“I’m not a big fan. I don’t see what that’s going to solve. I think that there’s a high chance, the way they described it in that segment, that it would lead for oil and gas prices to go up.” (emphasis added)
Even the media is calling out Wyden for a tax hike that put even more upward pressure on gasoline prices. CNN writes:
“However, there is a risk that imposing an additional tax on the oil industry would backfire by depressing investment at a time when companies need to spend more on expensive new drilling projects to keep up with demand.” (emphasis added)
Thankfully, there are other voices inside the White House acknowledging this tax hike wouldn’t make matters worse, as Bloomberg reports:
“Yet internally, aides remain concerned such a tax could hurt ongoing efforts to boost the supply of oil.”
If President Biden truly wants to boost domestic oil production, as he claims, to lower gasoline prices, then his top administration officials and Democratic allies in Congress should stop entertaining tax increases that would only cause prices to rise even higher.
Unfortunately, at nearly every turn, Democrats in Washington, D.C. have chosen the wrong path of pushing policies and messages that only send more mixed messages, which undermines American domestic energy production.