Setting the Record Straight: Higher Taxes Will Not Increase Production

This weekend, Rep. Ro Khanna (D-Calif.), who is the chairman of the House Oversight and Reform Subcommittee on Environment, went on Fox News claiming that a 1980’s windfall profit tax on oil companies “led to increased production and decreased prices,” as justification for a similar bill he and other fringe Democrats have proposed.

Except, that’s not actually true. Historically, similar efforts ended up decreasing production.

When President Carter passed the windfall tax in 1980, the tax served in decreasing American oil production while lining the pockets of foreign oil producers. According to the Congressional Research Service:

“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.”

In 1984 the U.S. Treasury insisted the tax be repealed, explaining in a study that “the perceived ‘windfall’ for producers has generally vanished.” When the Democrat-controlled Congress finally repealed the tax in 1988, they explained:

“(1) it was an administrative burden to the Internal Revenue Service, (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.”

Enacting another windfall tax on oil and natural gas producers is likely to have the opposite effect of what its sponsors claim will occur. As the Independent Petroleum Association of America and Energy In Depth’s Executive Vice President Jeff Eshelman wrote more than a decade ago:

“In the end, the Windfall Profits Tax led to less domestic production, more foreign imports and less domestic investment – three bad results. It may make good press to call for Windfall Profits Taxes, but it makes for bad domestic energy policy…

“Congress should not be a barrier to domestic development… Years of failure to act cannot be overcome in a few months. Congress needs to recognize that today’s problems are a result of past inaction on energy policy, past failures to recognize the constraints on domestic energy development. Meeting future energy challenges requires positive actions now – not burdensome new taxes.”

The same is still true today.

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