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Palin's windfall profits tax

Alaska_offshore_rig_2 When Alaska Gov. Sarah Palin had to find money for her state, where did she turn?

To the oil companies. But not the way you might expect.

According to Kevin Drum in his blog for Mother Jones magazine, as part of a tax reform measure last year, Palin raised taxes on the oil industry upon which Alaska, a state with no income or sales tax, relies.

Yep, a Republican tax raiser. And one who put the tax increase squarely on big business, one of the party's traditional constituencies.

But I'm sure John McCain knew that when he selected her as his vice president.

The tax price of oil: Palin's three-part plan calls for:

  • An increase in the basic tax rate on oil company profits from 22.5 percent to 25 percent.
  • A windfall profits provision. When oil prices went over $50 per barrel or so, the tax rate would rise 0.2 percent for each dollar.
  • A tax floor. If oil prices fell below about $40 per barrel, oil companies would still have to pay 10% of the gross price of the crude they produce.

Tax hot potato, potahto: Palin was especially dedicated to the windfall profits provision, writes Drum, only she called it "progressiveness."

Hmmm. I don't recall the GOP using that term when some Democrats on Capitol Hill wanted to talk about a federal windfall profits tax on the oil industry.

In fact, in today's New York Times, Republican stalwart Ben Stein takes issue with, in his words, Barack Obama’s Questionable Stimulus Plan.

One of the problems that Stein sees in the Democratic presidential candidate's proposal is the suggestion that another round of rebates be paid for by imposing a surtax on oil companies.

Stein pretty much encapsulates the basic outside-of-Alaska position against oil company windfall profits taxation:

But why punish successful oil companies with a surtax at all? After all, when did profits become a dirty word? And why does Senator Obama think oil companies make excessive profits?

I would argue that over the long term, oil companies’ profits relative to sales are not above average for industrial or financial companies. But even if they were, why punish the owners of the oil companies, who are largely pension plans, group or individual, and individual investors? Why should we punish some American firefighters who own oil company stocks more than American firefighters who own drug company stocks or tobacco stocks? Why tax away the savings of some Americans because they happen to own a share in a company that supplies a totally legal, absolutely indispensable product like oil? I don’t get that at all.

Maybe Stein can put in a call to McCain and Palin and see if they can help him understand the semantics -- progressive vs. dirty -- of her oil industry windfall profits tax.

Size matters: The amount of the tax also is sure to raise some questions and eyebrows.

Now I know Alaska is big (until global warming melts most of it and Texas reclaims its rightful spot as the largest state) and Alaskans, like Texans, are partial to grand gestures. But it also seems like Palin might have gone a bit overboard with this particular tax.

Drum says that the governor's new tax system represents a 400 percent increase in the amount of production taxes on the oil industry.

Again, you gotta wonder how a 400 percent tax increase would go over with the GOP faithful if that amount had been masterminded by a Democrat.

It definitely will be interesting to see how McCain and staff will spin this bit of information about his vice president pick.

Offshore Alaska rig photo courtesy of Minerals Management Service.


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Steve Verdon


That resposne was just lame. I'm no Palin supporter, I do however support the truth. Puts you in a rather unpleasant position, IMO.

A windfall profit's tax is a tax on what are deemed "excessive" profits. This tax does not work this way, it merely is tax on, in this case, the profit per barrel of oil, much like a corporate profits tax. There is a progressivity factor built in, but it is minisucule.

Now a windfall profits tax might look sorta, kinda like this type of tax, but it is far far more complicated. First a political body, e.g. the U.S. Congress, sets what it sees as the "right price", this could be say the market price at such-and-such date (i.e. a much lower price than the current price). Then excess profits per unit (barrel) would be calculated by increasing the price by an inflation factor (e.g. CPI less energy), severance taxes, and other roylaties. The remaining money above this level would be considered excessive and taxed at the legislated tax rate.

The last windfall profit tax was horrendously complicated in that it applied to anyone who was considered an oil producer broadly defined. Hence if you owned land, leased it to Exxon mobil who then sub-contracted it out to another company would all be filling out tax forms. If you were part of a co-operative that bought an oil well and then contracted with Texaco to exploit the well then you and everyone else in the co-operative would be filling out the tax forms.

It was complicated (i.e. wasted resources in preparing taxes which produces nothing), reduced the incentive to exploit new fields, and ended raising far far less revenue than was projected.

Really, as a journalist you should familiarize yourself with the facts and not what you wish were the facts.

Steve Verdon

It isn't a windfall profits tax, but a severance tax. No really. Most states have them and it is like a charge on the extraction of valuable non-renewable resources from State owned oil, coal, or natural gas.

The actual language of the proposal/policy does not use "windfall". This is no more a windfall profits tax than a corporate profit tax is a windfall profit tax. In short, you have been mislead.

Drum says that the governor's new tax system represents a 400 percent increase in the amount of production taxes on the oil industry.

Really? I've found Drum's grasp of numbers to be dubious at best, generally speaking. Considering that the prior tax was 22.5% and it increased to 25% I don't think it is that big. Although, the new tax does prohibit using expenses to existing facilities as exploration credits. That would increase the amount of tax owed, but if the 400% number is right, then oil companies were extracting oil from State owned land and not paying the residents of the State for it.

So...are we to conclude you favor corporate welfare from this?


and don't forget response #3: Your [choose one: concern, comment, complaint, issue question, argument] is irrelevant because John McCain is a POW.

Dan Ray

How will the Republicans deal with an embarrassing fact? Same as always. First, "Move along, move along, nothing to see here." Second, "Look over there! A pony!"

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