Economists Oppose Proposed Windfall Profits Tax on Gasoline

We, the undersigned economists,* write to strongly advise you against attempting to regulate the energy market through either government price controls or a so-called "windfall profits tax." Because of the recent increase in gasoline prices, some have proposed these measures. Either would be a mistake.

When the oil shocks of the 1970s hit, Milton Friedman and many other economists warned of the dangers of petroleum price controls and excessive energy taxes, which were then being advocated by some. Unfortunately, this wise counsel was not taken.

President Nixon's price controls were a debacle. This is true for the controls in general and those on the price of oil. Herbert Stein -- head of the Nixon Administration's Council of Economic Advisers and an opponent of the price controls -- observed later that the Nixon price controls on domestic oil had the effect of "encouraging oil imports, increasing our dependence and making it easier for OPEC to charge us a high price." We agree with President Nixon's belated admission about his price controls policy: "I believe that it was wrong. The piper must always be paid, and there was an unquestionably high price for tampering with the orthodox economic mechanisms."

The windfall profits tax was first enacted in 1980 as a "temporary" excise tax, which proponents said was designed to ensure that oil companies did not benefit from unanticipated windfalls caused by fluctuating crude oil prices. According to analysis by the Congressional Research Service, the windfall profits tax reduced domestic oil production in an estimated range of between 3 percent and 6 percent annually. It increased annual oil imports from between 8 percent and 16 percent. The tax, which created large compliance costs, but by 1987 and 1988 yielded almost no government revenue, was finally repealed by Congress in 1988 -- a goal that had been sought by President Reagan since the 1980 Presidential campaign.

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.

Sadly, the recent clamoring by some for price controls or for new energy taxes indicates that the lessons of the 1970s were not learned. We urge you to reject these measures and instead adopt policies that will allow our economy to grow and will not curtail domestic energy production and investment.

* Institutions are listed for informational purposes only.