The Governments Gas Problem

Government’s energy policies and regulations have been leading us down the wrong road for years, yet the only solution Governor Ed Rendell and plenty of Republicans like Sen. Arlen Specter can think of is to raise taxes. Of course, imposing a “Windfall Profits Tax” on Big Oil companies seems to be selling well on the campaign trail, but will it provide commuters and others who are reliant on oil and its byproducts with any relief?

The history of such government plans suggests that higher taxes will not only fail to provide short-term relief, but they create even more long-term problems in the process.

Congress is currently considering a “Windfall Profits Tax” provision in the Tax Reconciliation Bill which would levy an additional tax on U.S. oil companies’ profits (above and beyond existing corporate taxes). The objective of these tax penalties is to siphon off any unanticipated profits these companies experience as a result of marketplace fluctuations. (Of course, government has no plans to reduce its taxes should these companies experience a downturn in their profits.) Politicians are promising that government taking more in oil sales profits will somehow protect Americans from rising gas prices.

If only price fixing were the solution. Prices are not set by oil companies; rather they are a function of supply and demand. The demand side of the equation is affected by exponential global growth and use of oil products, while the supply side encompasses such factors as geopolitical instability, irregular weather patterns, and production capacity. Only the last variable is somewhat controllable, and that requires profits to be invested into domestic exploration, research, and technology for the future. It is also the area where government meddles most with its policies and regulations.

But instead of relieving oil companies of the hindering policies and regulations that are driving up our gas prices, Governor Rendell and others in Washington, D.C. want citizens to believe that we can somehow tax these companies (and ultimately ourselves) to lower prices or to greater supply levels.

This approach was tried in 1980. It was abandoned before the end of the decade, but not before domestic output decreased as oil and gas companies reduced their spending for exploration and technology and failed to expand capacity. At the same time oil imports increased over 15% as foreign companies were able to provide a cheaper product for the U.S. market. This, of course, led to a massive transfer of capital out of the American economy that could have been used to increase production capacity by U.S. companies.

The call for a “Windfall Profits Tax” is just another knee-jerk response from politicians like Ed Rendell that think such ideas sell well in an election year. But Big Government energy policies and regulations have been the problem in the past, and they are not the solution to the problem now. Consider that oil industry profits are less than 10 cents per gallon while state and federal government’s profits are between 50 and 64 cents per gallon. Who is really gouging consumers?

History has demonstrated the failure of such simplistic, political responses to gas price increases. Slapping another tax on our oil companies as they try to compete on the world maker where oil prices are set will do little to lower gas prices for Pennsylvanians. Instead of playing politics with our oil companies, Governor Rendell and his D.C. cohorts from both political parties should impose a “Windfall Profits Tax” on Big Government. Now that’s a tax that might solve the Bigger Problem.

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Matthew J. Brouillette is president and CEO of the Commonwealth Foundation (, an independent, nonprofit public policy research and educational institute based in Harrisburg.