Tom Steyer’s Windfall Profits Tax: Recyling Junk Policy

by Marlo Lewis on May 20, 2015

in Blog

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“Billionaire environmental activist Tom Steyer said Friday that he’s considering putting an oil-extraction tax on next year’s California ballot, increasing pressure on refiners amid a surge in gasoline prices and possibly raising the stakes on his climate change crusade,” reports The Sacramento Bee. The article continues:

Steyer, standing in front of a chart illustrating the recent price rise at the gas pump, said he may link a tax proposal with the requirement that oil companies disclose more information about their supplies and prices. . . . “There’s a huge human justice issue here about whether hardworking Californians are paying way too much for gasoline and the companies are being able to manipulate it . . . and triple their profits,” Steyer told reporters at the California Democratic Party convention in Anaheim, where he plans to meet with delegates and other officials to gather input. . . . California is one of 22 oil-producing states that don’t charge an oil-extraction tax. A 10 percent excise tax would raise about $2 billion annually.

Although conspiracy theories are typically worth less than squat, I must nonetheless comment briefly on the recent rise in gas prices, because Steyer has what it takes to get Democratic pols singing from the same sheet of music.

Nationally, the price of regular gasoline has rebounded from $2.06/gal. in January to $2.72/gal. today. Before concluding that dark forces must be at work, consider a few points:

  • Gas is still a dollar cheaper than it was in May 2014.
  • Gas prices tend to rise every year after January as refineries switch over from winter to summer gas, which is more costly to produce, and as demand increases with the onset of summer driving season.
  • “[R]obust U.S. gasoline consumption and exports, and increased demand for gasoline in Europe and Asia” are factors pushing up current prices, according to the U.S. Energy Information Administration.
  • The Federal Trade Commission hasn’t said a peep lately about unlawful market manipulation.

But here’s the thesis I would submit for your consideration. Steyer is a false foe of high gas prices. His proposed excise tax would squeeze the “hardworking Californians” about whom he professes to care.

(1) California has the highest gasoline prices in the Lower 48, due in no small part to tax, regulatory, and NIMBY (‘we don’t need no stinking pipelines’) policies Steyer enthusiastically supports.

Gas Prices Map May 20, 2015 Gasbuddy


Source: GasBuddy.Com

As an L.A. Times analysis explained last year:

On most days, gasoline in California costs more than it does in other states.

That’s partly because California is considered an island in the industry, cut off from other oil-producing regions by its stringent environmental rules and a dearth of interstate pipelines.

To improve air quality, the state limits the type of gasoline to a specially formulated blend commonly known as CARBOB. The blend, too expensive for most outside producers to make and deliver, is largely created within the state.

Before California adopted its special gasoline blend, refinery-level wholesale prices in the state averaged an inflation-adjusted 6 cents above the national average. From 1996 to 2014, they averaged 16 cents higher, according to Severin Borenstein, an economics professor specializing in energy markets and regulation at UC Berkeley’s Haas School of Business.

Taxes, among the highest in the country, also lift the price of the fuel. As of Jan. 1, California retail gasoline taxes California retail gasoline taxes accounted for 63.8 cents per gallon, 15 cents higher than the nationwide average. Toward the end of last year, when a gallon of regular gasoline cost an average of $2.68, fees and taxes accounted for nearly a quarter of the cost, according to the California Energy Commission.

If Steyer is so concerned about Californians “paying way too much” at the pump, why doesn’t he advocate cuts in the State’s motor fuel taxes, which are the highest in the land?

Gas Taxes by State API May 2015

Instead, Steyer led the charge in 2010 to defeat Proposition 23, a ballot initiative to suspend AB 32, the Global Warming Solutions Act of 2006. AB 32 this year imposed an implicit carbon tax on top of the State’s gas tax by subjecting refiners to the law’s cap-and-trade requirements. AB 32 is among the reasons California gas prices are going up.

(2) Steyer’s proposed new 10% excise tax would further increase Californians’ pain at the pump.

Oil companies would pass along the costs to the State’s households and businesses. Or if the tax does eat into their profit margins, refiners will likely invest less to expand capacity, potentially increasing the risk of supply bottlenecks and the associated price spikes.

If other States follow suit, as Steyer undoubtedly hopes, the proposal could discourage investment in the U.S. oil and gas sector generally. While that would make ‘progressives’ happy, the effects on oil production and prices might resemble those of another brilliant idea: President Jimmy Carter’s Windfall Profits Tax.

According to the Congressional Research Service, the “windfall profits” tax Congress enacted in 1980 diverted $79 billion — $227 billion in today’s dollars — from potential investment in energy infrastructure, reduced domestic oil production by as much as 6%, and increased petroleum imports by as much as 16%. Moreover, by discouraging production, the tax ended up costing more to administer than the revenues it raised.

Windfall Profits Tax


Source: Tax Foundation

If Steyer is serious about raising billions for California coffers, he should dump the failed windfall profits tax approach, urge State policymakers to allow new offshore oil production, and urge Democratic leaders in Washington, D.C. to let States share Outer Continental Shelf oil revenues with the federal government.

He won’t, of course. Rather, he’ll continue to advocate policies that would drive capital out of oil and gas. Moreover, he will do so despite it being common knowledge that (a) the U.S. oil boom is a key factor keeping global petroleum supply up and crude prices down, and (b) crude oil prices are the single biggest factor determining gasoline prices.

So although Steyer rails against oil companies for raising gas prices, he is effectively calling for a return to $4.00 gas or worse.


Tom Tanton May 20, 2015 at 9:03 pm

Steyer is just rolling out his failed proposition 87 for the third time now. High taxes and boutique fuels and refusal to site new refinery all the causes of California pain at the pump. And it is just factually wrong (dare I say lie?) to claim California doesn’t tax oil production. First some localities have severance taxes. Second and more importantly I think, California makes up for lack of severance tax but higher other forms of tax (property, corporate income, etc.) and actually is third highest taxes on production.

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