Gov. Jim Doyle proposes taxing big oil companies more than $270 million over the next two years to help pay for the state’s transportation needs. Doyle said the assessment will equate to $1.50 per barrel of oil sold in the state, and the companies would be prohibited from passing the tax on to customers at the pump. Violations carry a criminal penalty of up to six months in prison.
If we did levy a tax on the actual barrel of oil, the incidence of this tax will be jointly borne by consumers and suppliers with the division depending on the relative elasticities of demand and supply. I guess the Governor could make like President Carter and impose price controls, which would likely lead to shortages.
But what about a profits tax? Bill writes:
Windfall profits taxes are not good policy. They severely distort incentives and change the firms’ attitude toward risk. The capricious nature with which these taxes could be imposed, removed, or changed just adds to the distortion.
Time to turn the microphone over to Dean Baker:
While there is probably never a pure rent (meaning someone gets paid more than necessary to get them to provide a good or service), rents are generally a good place to look for revenue. The distortions from a well-designed windfall profits tax are almost certainly lower than the distortions from income or sales taxes. If we can substitute a windfall profits tax for more distortionary taxes, we are almost certainly coming out ahead.
For more, check out Dean’s link. I hope our friend Bill Polley checks it out without accusing me of getting angry at windfall profits tax bashing.