By Grace Gedye | Cal Matters
Few things agitate drivers — and make politicians sweat — like rising prices at the pump.
Gas prices in California are consistently higher than the rest of the country, thanks to state taxes, a cleaner fuel blend, an isolated gas refining market and more. But in September, California prices rose again and that gap widened.
Governor Gavin Newsom pointed the finger at the gas industry when he spoke to reporters in early October, saying the companies were ‘cheating’ drivers and called for a new ‘windfall profit’ tax for drivers. oil companies.
Valero, an international oil company that has refineries in California, saw its July-September profits jump 500% from the same period last year. And profits from gas operations on the West Coast rose significantly from April to June, compared to the same period last year, at companies that own some of the state’s largest refineries, according to an analysis by Consumer. Watchdog.
As Newsom plans to convene a special legislative session in early December to focus on the new tax, CalMatters spoke with experts about how the idea has worked in the United States and abroad.
This is not something states have done often.
No state had previously imposed a windfall tax, said David Brunori, a visiting professor of public policy at George Mason University and an expert on state-level tax policy. The one questionable exception: In 2006, Alaska began taxing net income from oil production, with a tax rate that increased as the price per barrel of oil rose. After some tweaks in 2007, the tax brought in billions of dollars for the state, part of which was used to issue $1,200 payments to residents to help deal with high gas prices, according to the Seattle Times.
However, after the tax was imposed, drilling declined and the amount oil companies invested in developing new oil dropped, according to the Alaska Journal of Commerce. But, Brunori said, it wasn’t really a windfall tax, because it wasn’t a direct tax on profits. It’s also unclear whether Newsom’s proposal will resemble the Alaska tax.
According to Severin Borenstein, an energy economist at UC Berkeley, a windfall tax probably won’t raise or lower gasoline prices, but it would be “very difficult to implement.”
Policymakers must decide exactly how much profit constitutes a windfall. “Above what level do we say, ‘That’s too much profit and we’re going to tax it?’ ” he said.
The United States temporarily enacted excess profit taxes during World War I, World War II, and the Korean War, with mixed results. When the US government massively increased spending during World War I, some companies saw their profit margins swell. So the government began taxing the profits of all industries above a certain return on investment, which brought about 40% of the tax revenue collected for the war.
But, because taxes were complicated, well-paid big-business lawyers could use “creative play” to lower their employers’ tax bill, while smaller companies without a phalanx of lawyers shouldered more of the burden. , said Joe Thorndike, director of the Tax History Project at Tax Analysts.
“These taxes, more than most, really depend on a moral argument, a moral justification, to exist, and when that starts to be set apart by these lapses in fairness, that really makes it a problem.” , said Thorndike.
The idea was revived in 1980, as the federal government prepared to relax price controls on oil produced in the United States. That year, Congress passed what it called a windfall tax, aimed at oil industry profits. The idea, Thorndike said, was that companies would benefit massively as the price of crude oil rose to market price, and the process would be costly and painful for consumers. The tax, however, was not a tax on profits, but rather a system of excise taxes on petroleum, according to a report by the Congressional Research Service.
It was not a resounding success. In the eight years it has been in effect, it has brought in $80 billion — far less than the $393 billion it was supposed to bring in, according to congressional researchers. Because the tax applied only to oil produced in the United States, it likely reduced domestic production while increasing the country’s dependence on foreign oil, congressional researchers found. It was also difficult for the Internal Revenue Service to administer and difficult for the oil industry to comply with. So in 1988 it was repealed.
As energy prices soared in Europe and the UK, leaders also turned to windfall taxes. Greece, Hungary, Italy, Romania, Spain and the UK have all introduced their own, and six other countries have signaled their intention to impose similar taxes, according to a September analysis by the Tax Foundation. At the end of September, the European Union accepted an exceptional tax on oil and gas profits.
Because these taxes in Europe are so new — and because they’re temporary — it’s hard to say what impact they will have, said Sean Bray, EU tax policy analyst at the Tax Foundation.
Here in California, Borenstein, the energy economist at Berkeley, hopes the legislature will use the special session to discuss what he sees as the Golden State’s “fundamental problem” when it comes to gas: figuring out how to keep adequate supply while the state is using its cleaner blend and trying to phase out the use of fossil fuels.
“We are completely ignoring this issue, until there is a big spike in prices,” Borenstein said. “And then everyone is running around shouting how outrageous this is, instead of having a serious political discussion about the right way to handle this.”
Details are spared at this point. But the basic idea is that companies that extract, produce and refine oil would pay a higher tax rate on their income above a fixed amount each year, a spokesman for the governor said. Money raised from the tax would be sent via refunds to “California taxpayers impacted by high gas prices,” a spokesperson said in an email.
The logic behind windfall taxes is to tax a company at a higher rate when it makes giant profits – a “windfall” – for a reason that is not of its own volition.
Often, there’s also a moral dimension to the thinking, said UCLA tax law professor Kirk Stark. Theoretically, taxing very high profits at a very high rate should make companies less likely to take advantage of circumstances such as war and natural disasters to raise prices – like a trader who raises the price of bottled water by 2 to 40 dollars following a hurricane. “There’s almost a kind of moral judgment that in certain situations market prices can be immoral,” Stark said.
Getting the right incentives is difficult, Borenstein said, as is preventing companies from evading taxes. If, for example, the state taxes California refinery profits, those refineries — owned by companies such as Chevron and Valero — could start buying oil from another division of their parent companies at higher prices.
By doing this, they could reduce their profit. And if they no longer make big profits, their tax bill will go down.
“The devil is in the details,” Borenstein said.