Tuesday, August 9


Musing on the energy bill that Bush has just signed,, a piece of legislation "that provides billions of dollars in tax subsidies to energy companies, but that even he has acknowledged will do little to alleviate the high prices of gasoline at the pump for most Americans" at a time when oil companies are recording record profits, a friend and I began fondly remembering Jimmy Carter's response to a similar situation back in 1979. Interestingly, this AEI-Brookings Joint Center for Regulatory Studies recommendation made during the 2001 California energy crisis confirms that the Carter "windfall profits tax" was effective then. Would that we could bring it back -- but that is hardly likely with the Rethugs in control of the Congress and the White House. No, they're perfectly satisfied with high energy prices, enormous profits for the companies, and no consumer relief in sight -- after all, "relief" is a dirty word to the BushCo gang. It implies charity for the undeserving. On the other hand, they interpret "tax subsidies" as the rightful concession to wealthy producers to incentivize them to increase production. Funny, as a businesswoman, I thought record profits was motive enough. My own company is certainly rapidly expanding its operations and its investment in R&D with the high profits this economy is returning to our own industries.

In 1979 U.S. allies called for the removal of price controls to bring down the price of oil. The critics asserted that the controls raised the world's demand for oil while depressing production by those outside the OPEC cartel. The consequence was a higher price for oil. Today electricity price controls have the same effect. Conservation is discouraged and low-cost production is shut down. The gap between supply and demand is filled with output from very high-cost facilities.

President Carter deserves credit for finding a way out of the mess in 1979. He took the bold and controversial step of removing price controls on oil but at the same time proposed a windfall profits tax on producers, which Congress enacted in 1980. The tax didn't take away all of the windfall profits––the excess generated by prices above the previous controlled prices––but it did take anywhere from 30 percent to 70 percent of them (depending on the price of the crude). The proceeds were recycled to consumers and to support of development of alternative energy sources. The windfall tax was removed by Congress in 1988, when crude prices were far lower and the tax was no longer generating revenue.

President Bush and Congress now have the opportunity to take a similar courageous step: remove all price controls on electricity and enact a windfall energy profits tax. The tax should capture a portion of any electricity and gasoline price increases above a benchmark. The proceeds should be returned to consumers through income tax reductions that moderate the impact on the poor, small businessmen and other consumers who would suffer from higher prices. When prices come down––as they will once increased conservation and new production have come into play––the tax should be removed.

To be sure, a tax-refund system is tricky to design and will not be perfect. But as it was 20 years ago, a windfall profits tax is far preferable to both price controls and the prospect of even higher energy prices and windfall profits.


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