Don't Revive Jimmy Carter's Energy Policy

While the Republican Party’s conservative base has been up in arms over the Bush Administration’s spending spree of the past five years, the President’s tax policy has been a point of consolation. Will that soon evaporate?

Spending-induced federal deficits have already curtailed talk of further tax cuts, as Republican congressional leaders are now struggling merely to make permanent the tax relief enacted during the President’s first term. But even worse, some Republicans are now advancing plans to raise taxes. Spurred on by normally sensible senators, such as Judd Gregg of New Hampshire, the Senate Finance Committee last week added a $5 billion windfall-profits tax on oil companies to a bill extending some of the first term tax cuts.

Terrible Economics

Dropping a windfall-profits tax onto the backs of oil companies (and their millions of investors) is nothing more than political pandering. It is terrible economics, as relatively recent history documents.

In 1980, President Jimmy Carter signed a windfall-profits tax on oil companies. According to analysis by the Congressional Research Service (CRS), Carter’s windfall profits tax reduced domestic oil production from 3% to 6% annually. It increased annual oil imports from 8% to 16%.

The tax also created large compliance costs, and by 1987 yielded almost no government revenue (initial projections were that it would rake in $393 billion). Finally, in 1988, Congress repealed it, achieving a goal that had been sought by President Reagan since the 1980 campaign.

This history explains why more than 250 economists (including two Nobel laureates) recently signed a letter opposing a windfall-profits tax. The letter, circulated by the National Taxpayers Union, stated in part, “If it is again enacted, a windfall profits tax can be predicted to result in a diminution of domestic energy production, an increase in American dependence on foreign oil, and a reduction in the overall supplies available to consumers.”

Of course, a windfall-profits tax on oil firms would be incredibly unfair. Why should oil companies pay such a tax but not firms in other industries that are making large profits?

Further, the oil industry is very cyclical, and for oil companies to invest the billions of dollars needed for oil exploration and development, they need to make strong profits in some years to offset billions in losses in lean times. If they don’t make these profits, they won’t explore and produce oil (hence the disastrous consequences of the Carter windfall-profits tax on domestic oil production).

Reagan’s Rebuttal

In the presidential campaign debate of Oct. 28, 1980, Carter’s windfall-profits tax and energy policy were discussed several times. In outlining his opposition to most of what Carter had foisted upon the country, Reagan argued, “I just happen to believe that free enterprise can do a better job of producing the things that people need than government can. The Department of Energy has a multi-billion-dollar budget in excess of $10 billion. It hasn’t produced a quart of oil or a lump of coal, or anything else in the line of energy.”

Many Republicans in Congress see themselves as inheritors of the Reagan legacy. It’s too bad some of them today seem more interested in adopting Jimmy Carter’s failed tax and energy policies than Ronald Reagan’s.