A Windfall for Unemployment

The Carter-level bad idea stalking New Mexico

MIT. Harvard. The London School of Economics. The World Bank. The U.S. Department of the Treasury. The Executive Office of the President’s National Economic Council.

It doesn’t get more establishment than Larry Summers.

But even in an era of Unlimited Government, the ultimate insider economist understands that taxing the “windfall” profits of oil companies is unwise.

In an interview with Bloomberg last week, Summers recommended that the president “stop all talk of windfall profits taxes as the single most important thing he can do to incentivize oil companies.”

Good advice. Summers, unlike U.S. Rep. Ro Khanna (D-CA), U.S. Sen. Sheldon Whitehouse (D-RI), and many other intellectually challenged leftists, knows the disastrous consequences of the windfall-profits tax Jimmy Carter signed into law in 1980.

As the Cato Institute noted, the levy

was, in fact, an excise tax on domestic oil production effective March 1, 1980, and that tax was paid before profits from the sale of oil were determined. Accordingly, profits had no bearing on how much windfall profit tax was paid. Producers, however, could deduct those taxes from income tax liabilities because they were considered a cost of doing business.

The excise taxes were imposed on the difference between the market price for oil and a designated “base price” adjusted quarterly for inflation and state severance taxes. The taxes were applied at the point of first sale, generally to a refiner.

A 2006 report by the Congressional Research Service (CRS) concluded that “the tax’s role in increasing dependence on imported oil, distorting resource use in the energy markets and the economy, as well as the administrative and compliance burden of the tax, all played a role in its repeal.” Ronald Reagan pulled the trigger on the levy in 1988, and even Barack Obama declined to push for reinstatement.

The CRS found that the tax reduced “domestic production and supply,” and when combined with petroleum’s global price decline, raised 80 percent less tax revenue than expected.

Source: “The Crude Oil Windfall Profit Tax of the 1980s: Implications for Current Energy Policy,” Congressional Research Service, March 9, 2006

What would disincentivizing oil exploration and production do to New Mexico in 2022? Almost certainly contribute to the reversal of a very positive trend. The same month that Michelle Lujan Grisham panicked over COVID-19, and imposed a lockdown, the state hit its all-time petroleum peak: 34.5 million barrels. (The figure was an increase of seven and a half times from the modern trough of 4.6 million barrels, reached in August 2006.) In April and May 2020, as Planet Earth’s economy slowed to a crawl, production declined. But then something pretty amazing happened. Things got better. And for seven months in a row now, production has topped 40 million barrels.

Source: The Rock of Talk analysis of U.S. Energy Information Administration data

Over the past 12 months, the unemployment rates in the Land of Enchantment’s three largest hydrocarbon-tapping counties have plummeted. It’s difficult to believe, given the state’s dismal overall economic performance, but the numbers don’t lie — the places that need jobs the most are getting them.

Source: The Rock of Talk analysis of New Mexico Department of Workforce Solutions data

Taxing “windfall” profits is so asinine, even Martin Heinrich hasn’t endorsed the proposal. Let’s hope it stays as dead as the Starland Vocal Band, leisure suits, and the AMC Pacer.