Could Biden Really Impose Windfall Tax on Big Oil?

Windfall taxes were popularized in the United States during the 1970s, however, they have since become a much lesser-used instrument of public policy. A windfall tax is a one-time tax applied to higher-than-expected profits or resource utilization accrued in a particular sector of the economy. The new presidential administration of Joe Biden has been looking recently to implement a windfall tax on Big Oil. 

The purpose of this article is to cover the underlying implications of such a measure, exploring if Biden could really impose such a tax on Big Oil companies and, if so, how would such a windfall tax work?

What Is a Windfall Tax and How Can Joe Biden Impose One?

A windfall tax is considered a type of excise tax that can be imposed by a government on a certain sector or group of companies or individuals when the benefits for the companies or individuals exceeds a certain level. Although windfall taxes have been used relatively sparingly in the United States, mainly during times of economic crisis, such as the oil crisis of the 1970s, Joe Biden has recently been rumored to be looking into a windfall tax on certain sections of the oil industry.

The concept of Biden imposing a windfall tax on “Big Oil” might, at first glance, seem a bit farfetched. However, the current president’s executive authority and authority to impose the tax are a bit more in line than most people realize.

The truth is that the president, without the approval of Congress, can impose a windfall tax, due to precedent set by the US Supreme Court. In 2014, the Supreme Court essentially concluded that the executive branch has the authority to impose an excise tax if it could be shown that there was a benefit to be taxed, and that such a tax was being done to achieve a particular public policy objective. This essentially meant that a president has the authority to introduce a windfall tax in specific sectors of the economy and the Biden administration believes that a windfall tax on Big Oil is warranted and appropriate.

How Would a Windfall Tax on Big Oil Work?

The concept of a windfall tax on Big Oil is a complex one, so how would it work in practice? The immediate question is, which Big Oil companies would be targeted by the Biden administration’s proposed windfall tax?

It is too soon to be sure which oil companies would be targeted if the Biden administration successfully implements a windfall tax. However, the most logical guess is that the tax would apply to the five largest oil companies in the US, namely, Chevron, BP, ExxonMobil, ConocoPhillips, and Royal Dutch Shell.

Once the companies to be targeted by this proposed windfall tax have been identified, the next logical question revolves around what the actual tax rates for such companies will end up being. Again, too soon to tell, but it is quite likely that the proposed windfall tax rate could range anywhere from 25% to 75%.

The exact timeframe for the Biden administration to implement a windfall tax is currently anyone’s guess, but it is almost certain that it will encompass the entire 2021 calendar year. Further, if the Biden administration is successful, the windfall tax could also be applied in future years, depending on the level of success achieved in terms of revenue collection.

Advantages and Disadvantages of Windfall Tax on Big Oil

As with any major tax reform, there are both potential positives and negatives that come into play with a windfall tax on Big Oil Companies. Let’s look at some of these advantages and disadvantages in more detail.

Advantages of Windfall Tax on Big Oil

  1. A windfall tax on Big Oil could help reduce economic inequality to some extent, by taking a “bigger cut” out of the profits of the five largest oil companies in the US.

  2. The revenue generated by the proposed windfall tax could be used to fund infrastructure projects and green energy initiatives, benefiting the entire economy.

  3. A windfall tax on Big Oil could also deter companies from making risky investments, as the risk of significant losses could be too great to make such investments worthwhile.

Disadvantages of Windfall Tax on Big Oil

  1. A windfall tax could put the five largest oil companies in the US in an economically fragile position and might even lead to these companies not being in business anymore.

  2. This proposed windfall tax could also lead to higher fuel prices and may make US oil markets less competitive as other countries could easily undercut US prices.

  3. Lastly, a windfall tax could also end up driving investment away from the US oil industry, resulting in job losses and a decrease in the overall economic health of the country.

Joe Biden’s proposed windfall tax on Big Oil is an intriguing idea that has both potential positives and negatives for the US economy. It is still uncertain if the Biden administration will be able to impose a windfall tax on Big Oil and what the precise tax rates would be. Furthermore, the exact timeframe and impact of this proposed windfall tax are currently unknown, as the Biden administration will have to overcome quite a few hurdles in the US Congress.

On the one hand, such a tax could help reduce inequality and jump start green energy initiatives and other infrastructure projects in the US. On the other hand, it could make US oil markets far less competitive and also lead to job losses and a decrease in the overall economic health of the country.

It is clear that, if implemented, a windfall tax on Big Oil could potentially have a major impact both financially and politically. It will take some time for the Biden administration to see if its efforts are ultimately successful in this regard and any changes owing to a windfall tax, if implemented, would not be felt immediately; however, this proposed tax could prove to be a major milestone for American economic policy.