Topic:
CORPORATIONS; GASOLINE TAX; LEGISLATION; OIL; PRICE CONTROL; TAX CREDITS;
Location:
ENERGY; TAXATION;

OLR Research Report


September 23, 2008

 

2008-R-0532

WINDFALL PROFITS TAXES ON OIL COMPANIES

By: Kevin E. McCarthy, Principal Analyst

You asked for brief summaries of (1) the former federal windfall profits taxes on oil companies and (2) current oil and gas production tax imposed by Alaska. Much of the information in this report on the federal tax is taken from a 2006 Congressional Research Service report, which is available at http://assets.opencrs.com/rpts/RL33305_20060309.pdf.

SUMMARY

The federal windfall profits tax was in effect from 1980 to 1988. In spite of its name, the measure was not a tax on profits but instead was an excise tax on the difference between the market price of oil and a statutory 1979 base price that was adjusted quarterly for inflation and state severance taxes. The tax rate varied based on several factors, including whether the oil was produced from an existing or new field and whether it was produced by an integrated oil producer (one that also refined and sold petroleum products) or an independent producer. The tax created net revenues of approximately $80 billion over its life.

Alaska's oil and gas production tax is similar to the former federal tax. It applies a percentage tax rate on the net value of oil and natural gas produced in the state. The 25% base tax rate increases slightly when the West Coast price of oil or gas, less the cost of producing it, is above $30 per barrel or its equivalent for gas. There is also a floor on the tax on oil and gas produced from the state's North Slope based on its gross, rather than net, value.

FEDERAL WINDFALL PROFITS TAX

From August 1971 to January 1981 the federal government controlled the price of domestic oil. Legislation passed in 1975 allowed the president to gradually phase out price controls over the period between June 1979 and September 1981, after which prices would rise to world market levels. The windfall profit tax was tied to President Carter's 1979 decision to use this authority. The legislation establishing the tax (P.L. 96-223) was signed into law on April 2, 1980.

The windfall profits tax was a system of excise taxes on domestically produced oil effective March 1, 1980. The tax was imposed on the difference between the market price of oil and a statutory 1979 base price that was adjusted quarterly for inflation and state severance taxes. All oil that was not specifically tax-exempt was classified into categories or “tiers” based upon the age of the well, the type of oil, and the amount of daily production. By 1985, approximately one-third of the oil produced in the U.S. was tax-exempt, including much of the oil produced in Alaska.

For each tier there was one or more tax rates and a corresponding base price. As described in Table 1, the tax rates and base prices differed not only according to the type of oil but also according to whether an oil producer was an integrated producer (called a major) or an independent oil producer. The tax rates applicable to oil sold by an independent oil producer were lower than those applicable to oil sold by a major integrated producer. The windfall profit tax on any barrel of oil was limited to 90% of the net income (profit) from the sale of that oil. While the tax was called a “profit” tax, it was really a special type of excise tax on oil producers. The tax was paid first, before profits from the sale of the oil were determined. And except for the net income limitation, profits had no bearing on how much windfall profits tax was paid.

Table 1: Federal Windfall Profits Tax Rates

Type Of Oil

Tax Rates

Average Base Price

Per barrel(1980)

Oil from most wells in fields that were producing before 1979

70% for oil produced by majors

50% for oil produced by independents

$12.81

Oil from stripper (low volume) wells and the Naval Petroleum Reserve

60% for oil produced by majors

30% for oil produced by independents

$15.20

Heavy oil and incremental production of oil using tertiary recovery methods

30% for all producers

$16.55

Newly discovered oil

22.5% for all producers

$16.55

The windfall profits tax was a deductible expense in determining an oil producer's federal income tax liability because it was considered a cost of doing business. As a result of paying the windfall profits tax, a producer's income tax liability was lower than it would have been without the tax. The windfall profits tax produced a cumulative total of approximately $80 billion before it was repealed in 1988 by (P.L. 100-418), net of the reduced income tax payments.

ALASKA OIL AND GAS PRODUCTION TAX

Alaska's oil and gas production tax (Alas. Stat. Sec. 44.55.011) applies a percentage tax rate on the net value of oil and natural gas produced in the state. In the case of oil, the net value is the market value of the oil that is shipped to the West Coast, after deducting the producer's production costs (currently about $25 a barrel). The law provides for transferable credits against the tax for various expenditures, including oil and gas exploration investments and contributions to higher education institutions in the state. This tax is in addition to royalties paid to the state from production on state land and income and property taxes.

There is a minimum tax based on the gross value of oil produced from the state's North Slope. The minimum is 4% of the gross value so long as the average price of oil on the West Coast is at least $25 per barrel (the percentage decreases if the price falls below this level).

There are separate tax rates for (1) oil and gas produced from the fields around the Cook Inlet in southern Alaska and (2) oil and gas produced from property that constitutes a landowner's royalty interest.

In 2007, HB 2001 increased the base tax rate from 22.5% to 25.0% of the net value of the oil or gas. The legislation modifies a feature of the tax under which the tax rate increases once the market price reaches a specified level. Under the act, if the net value of oil or gas is less than $92.50 per barrel of oil equivalent, it is subject to a tax of 25% of the net value plus 0.4% times the difference between the net value and $30. Thus, if the net value was $80 per barrel equivalent, the tax would be $20.20 (25% times $80, plus 0.4% times $50). The rate of the added tax falls to 0.1% times the difference between the net value and $30 if the net value exceeds $92.50.

The act has many other provisions. These include (1) increasing credit for exploration expenditures, (2) making certain expenditures, such as those associated with cleaning up spills, ineligible for the credits; (3) establishing a state fund for purchasing the credits.

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