The Crude Oil Windfall Profit Tax Act: Context and Content

Debate over natural gas pricing has included the consideration of a windfall profit tax, with the oil windfall profit tax as a possible guide to what might be levied on natural gas at the wellhead. This report reviews the issues surrounding the enactment of the crude oil windfall profit tax, spells out its provisions, and provides data on the revenues collected and anticipated.

Jut. 1 4 1983 Report No. 81-270 E THE CRUDE OIL WINDFALL PROFIT TAX ACT: CONTEXT AND CONTENT by Bernard A. Gelb Analyst in Industry Economics Economics Division COMPLIMENTS OF U.S. DEPOSITORY MATERIAL GOVERNMENT DOCUMENTS COLLECTION NORTHERN KENTUCKY UNIVERSITY LlBfiASY December 17, 1981 The Congressional Research Service works exclusively for the Congress, conducting research, analyzing legislation, and providing information at the request of committees, Members. and their staffs. The Service makes such research available, without partisan bias, in many forms including studies, reports, compilations, digests, and background briefings. Upon request, CRS assists committees in analyzing legislative proposals and issues, and in assessing the possible effects of these proposals and their alternatives. The Service's senior specialists and subject analysts are also available for personal consultations in their respective fields of expertise. ABSTRACT Debate over natural gas pricing has included the consideration of a windfall profit tax, with the oil windfall profit tax as a possible guide to what might be levied on natural gas at the wellhead. This report reviews the issues surrounding the enactment of the crude oil windfall profit tax, spells out its provisions, and provides data on the revenues collected and anticipated. CONTENTS ................................................................ iii I INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 A . Background ................................................... 1 B . Issues ........................................................ 2 I1 . CONTEXT OF THE DEBATE ........................................... 5 A . Controls on Oil ............................................... 5 B . Oil Industry Tax Treatment .................................... 6 C . Oil Industry Profits .......................................... 6 D . Domestic Production ........................................... 7 E . Use of the Revenues ........................................... 8 III . WINDFALL PROFIT TAX CHRONOLOGY .................................... 9 A . Initial Enactment ............................................. 9 B . Post-Enactment Objections ..................................... 9 C . December 1980 Change .......................................... 1 0 D . Tax Act of 1 9 8 1 ............................................... 10 E . Legal Challenge ............................................... 11 IV . PROVISIONS OF CRUDE OIL WINDFALL PROFIT TAX ACT. AS AMENDED ....... 13 A . Tax Structure and Rates ....................................... 13 B . Allocation and Use of Funds ................................... 16 C . Residential Energy Tax Credits ................................ 17 D . Business Energy Tax Incentives ................................ 17 E . Low-Income Energy Assistance .................................. 19 F . Miscellaneous Provisions ...................................... 20 V. REVENUE EFFECTS ................................................... 21 A . Projections ................................................... 21 B . Collections and Contingencies ................................. 24 SELECTED REFERENCES ..................................................... 29 ABSTRACT THE CRUDE OIL WINDFALL PROFIT TAX ACT: CONTEXT AND CONTENT INTRODUCTION Background In an attempt to reverse the Nation's growing use of foreign petroleum, President Carter in June 1979 began a gradual process of removing domestic petroleum price controls that had existed in some form since August 1971. Despite the steep world oil price increases and supply interruptions during the middle and late Seventies, U.S. consumption of petroleum continued to increase, and the proportion of oil consumed that came from abroad persisted above 40 percent. It was expected that higher prices for domestic oil would encourage domestic production and discourage consumption of petroleum, thus reducing imports. President Reagan removed price controls completely on January 28, 1981. With the removal of controls on the prices of domestically produced crude oil (first gradual, and then total), U.S. oil companies would be expected to derive substantially higher revenues and profits from the new price levels. Many outside the oil industry held that much of the additional profit would be an unearned "windfall" that should be recovered through a tax, which should be used to assist the financing of other energy objectives and related energy programs, and for equity and income-distribution reasons. Opponents of such a tax argued that it would yield at least two unwanted results. First, they said, the tax would remove some of the profits from oil operations that would other- wise go into exploration to increase the oil and gas supplies available to meet U.S. needs. Second, the tax would further reduce the financial incentives to produce more oil, especially from higher-cost marginal properties, and some incentive to engage in more risky and/or deeper exploration activities. It should be noted that proposals for a tax to reduce or eliminate "windfall profits" on the production or sale of petroleum or its products has roots at least as far back as the 1973-1974 oil embargo. The Crude Oil Equalization Tax put forward by President Carter in April 1977 and several excess profits tax proposals in 1973 and 1974 had approximately the same objective. B. Issues Much of the debate over WPT has centered around questions of to whom the increased revenues from decontrol should accrue, how the burden of any of such tax should be apportioned among oil producers, and the extent to which any tax will discourage domestic production of oil. Windfall profit tax (WPT) proposals are, in theory, mechanisms for the redistribution of income and reallocation of resources -- the shifting of antici- pated industry revenues to the general public or to low-income groups, or for use in energy conservation and alternative energy development. In 1979, there was concern that higher energy prices resulting from decontrol would redistribute income from low- and middle-income groups to company stockholders and other owners of oil producing properties, who tend to have higher than average incomes. Those with oil interests contended that such redistribution was an appropriate correction of distortions in income distribution caused by oil price controls. Those advocating a WPT contended that a substantial portion of the additional profits earned by the oil companies as a result of decontrol from wells that were producing oil before decontrol should be considered excessive. This was asserted on the grounds that the world price is an artificially set monopoly price, rather than a truly economic (free market) price, that much of the additional profits do not represent a reward for risk undertaken, and that, for many properties already producing oil, higher prices and profits would provide little incentive for additional production since little additional oil can be obtained. Opponents of the WPT responded that supply and demand interaction rather than production cost is the normal and appropriate determinant of price and replacement value, and that the price charged by an OPEC country--even though a monopoly price--is the true replacement value. Only this true economic price, it is reasoned, will provide sufficient funds to undertake new exploration, development and production. Arguments pertaining to OPEC monopoly pricing have been less central during 1981, when oil market slack has caused an actual, if temporary, decline in the real price of oil. (This slack has been caused primarily by Saudi Arabia's continued high production and by a drop in world oil consumption in response to higher prices and weakened economic conditions.) Some recognition was given to the idea that certain categories of oil-heavy crude, "stripper" oil (from wells producing 10 barrels per day or less), and oil produced by advanced ("tertiary") recovery techniques, for example-require the economic incentive offered by world prices because of the higher costs associated with their production. Too great a reduction of the revenue gains resulting from decontrol might act to reduce significantly or eliminate producer incentives to raise domestic production of these categories. Controversy over t h e w i n d f a l l p r o f i t t a x has p e r s i s t e d a f t e r i t s passage a s p a r t o f t h e Crude O i l W i n d f a l l P r o f i t Tax Act of 1 9 8 0 , and s u b s e q u e n t modifications. T h e r e i s s t i l l some s t r o n g o b j e c t i o n , e s p e c i a l l y w i t h i n t h e o i l 1/ i n d u s t r y , t o t h e t a x a s a whole and t o many of i t s d e t a i l s . - Debate o v e r s u c h a t a x h a s s p r e a d t o n a t u r a l g a s p r i c i n g , where t h i s k i n d of t a x i s b e i n g c o n s i d e r e d a s a c o n c o m i t a n t t o e a r l y d e c o n t r o l of n a t u r a l g a s p r i c e s . 1 / S e e t h e a r c h i v e d I s s u e B r i e f " O i l W i n d f a l l P r o f i t s Tax" ( I B 80010) f o r a d d i t i o n a l d e t a i l s on t h e c o n t e x t and t h e l e g i s l a t i v e h i s t o r y of t h e w i n d f a l l p r o f i t t a x i n t h e 9 6 t h and 9 7 t h C o n g r e s s e s . 11. A. CONTEXT OF THE DEBATE C o n t r o l s on O i l F e d e r a l c o n t r o l s on o i l covered v i r t u a l l y a l l p h a s e s o f p r o d u c t i o n , r e f i n - i n g , and d i s t r i b u t i o n o f c r u d e o i l and p e t r o l e u m p r o d u c t s . i n t h e Economic S t a b i l i z a t i o n Act o f 1970 ( P . L . 9 1 - 3 7 9 ) , Controls originated which gave t h e P r e s i - d e n t b r o a d p o w e r s , i n c l u d i n g t h e a u t h o r i t y t o a l l o c a t e c r u d e o i l and p e t r o l e u m p r o d u c t s , t o c o u n t e r a c t a n y a n t i c o m p e t i t i v e a s p e c t s o f o i l s h o r t a g e s , and t o e l i m i n a t e any w i n d f a l l p r o f i t s . T h r e e k e y p i e c e s o f l e g i s l a t i o n a f t e r 1 9 7 0 , w h i c h b u i l t o n t h e Economic S t a b i l i z a t i o n Act and o n e a c h o t h e r , t o g e t h e r f a s h i o n e d t h e g u i d e l i n e s f o r t h e s y s t e m o f c o n t r o l s o n p e t r o l e u m p r i c e s and i n d u s t r y o p e r a t i o n s : P e t r o l e u m A l l o c a t i o n Act o f 1973 ( P . L . t i o n Act o f 1975 ( P . L . 9 4 - 1 6 3 ) ; o f 1976 ( P . L . 94-385). 93-159); t h e Emergency t h e E n e r g y P o l i c y and C o n s e r v a - and t h e E n e r g y C o n s e r v a t i o n and P r o d u c t i o n Act The m a n d a t o r y p r i c e c o n t r o l s p r o m u l g a t e d b y t h e s e l a w s e x p i r e d o n May 3 1 , 1 9 7 9 ; b u t t h e P r e s i d e n t had an o p t i o n t o c o n t i n u e t h e cont r o l s t h r o u g h t h e end o f S e p t e m b e r 1981. By e a r l y 1 9 7 9 , d o m e s t i c a l l y p r o d u c e d p r i c e - c o n t r o l l e d c r u d e s were p r i c e d s i g n i f i c a n t l y u n d e r w o r l d o i l p r i c e s , and t h e g a p was b e i n g s t e a d i l y e n l a r g e d . P r e s i d e n t C a r t e r e x e r c i s e d h i s o p t i o n b y i m p l e m e n t i n g a scheme t h a t would g r a d u a l l y d e c o n t r o l ~ r i c e so f d o m e s t i c c r u d e o i l b e t w e e n J u n e 1, 1 9 7 9 , and Septemb e r 3 0 , 1981. A t s p e c i f i e d r a t e s , crude o i l i n lower-priced t h e o l d c o n t r o l s y s t e m ) would move i n t o h i g h e r - p r i c e d categories (under categories, resulting in a l l d o m e s t i c c r u d e o i l becoming d e c o n t r o l l e d a t t h e f i n a l d a t e . Prices of a l l m a j o r r e f i n e d p r o d u c t s e x c e p t g a s o l i n e had b e e n i n d i v i d u a l l y d e c o n t r o l l e d between J u l y 1976 and March 1979. President Carter did not l i f t o r otherwise modify t h e c o n t r o l s on g a s o l i n e p r i c e s . On J a n u a r y 28, 1981, newly i n a u g u r a t e d P r e s i d e n t Reagan removed t h e p r i c e c o n t r o l s o n c r u d e o i l and g a s o l i n e c o m p l e t e l y . By t h e n , o n l y a b o u t one t h i r d o f d o m e s t i c c r u d e p r o d u c t i o n was s t i l l u n d e r p r i c e c o n t r o l s . B. O i l I n d u s t r y Tax T r e a t m e n t Debate on some of t h e i s s u e s c o n n e c t e d w i t h WPT p r o p o s a l s f o c u s e d on p r i o r t a x treatment of t h e o i l industry. It was h e l d t h a t o i l and g a s p r o d u c t i o n had been r e c e i v i n g f a v o r a b l e t a x t r e a t m e n t f o r many y e a r s , a l t h o u g h one s p e c i a l prov i s i o n , d e a l i n g w i t h p e r c e n t a g e d e p l e t i o n , was r e p e a l e d f o r most o i l and g a s p r o d u c e r s i n 1975. Even w i t h o u t p e r c e n t a g e d e p l e t i o n , a s u b s t a n t i a l p o r t i o n of c a p i t a l i n v e s t m e n t c a n b e d e d u c t e d when i n c u r r e d , r e s u l t i n g i n a lower e f f e c t i v e t a x r a t e t h a n would o c c u r under t h e s t a n d a r d t a x system. A lower t a x r a t e l e a d s t o a g r e a t e r a l l o c a t i o n of c a p i t a l t o t h e p r o d u c t i o n o f o i l and g a s t h a n would o c c u r under a normal t a x r a t e . P r i o r t o t h e substan- t i a l p r i c e r i s e s o f f o r e i g n o i l , a m a j o r r e a s o n advanced f o r s p e c i a l t r e a t m e n t o f t h e p e t r o l e u m i n d u s t r y ( f o r example, lower t a x e s and i m p o r t q u o t a s ) was nat i o n a l s e c u r i t y , b e c a u s e f o r e i g n o i l p r i c e s were r e l a t i v e l y low and a l l e g e d l y posed a t h r e a t t o t h e e x i s t e n c e o f a d o m e s t i c i n d u s t r y ( v i t a l i n t i m e o f nat i o n a l emergency). Some c o n t e n d e d , however, t h a t b e c a u s e f o r e i g n o i l p r i c e s h a v e i n c r e a s e d s u b s t a n t i a l l y and t h e p r i c e o f new d o m e s t i c o i l h a s i n c r e a s e d s u b s t a n t i a l l y a s a r e s u l t , f a v o r a b l e t r e a t m e n t of o i l and g a s i s no l o n g e r appropriate. The c o u n t e r a r g u m e n t i s t h a t WPT t a x e s amount t o u n f a v o r a b l e t r e a t - ment o f o i l and g a s , when t h e need f o r d o m e s t i c p r o d u c t i o n of o i l and g a s i s a s great a s ever. C. O i l Industry Profits O i l company p r o f i t s have a t t r a c t e d wide a t t e n t i o n s i n c e t h e 1973-1974 Arab o i l embargo and s u b s e q u e n t l a r g e i n c r e a s e s i n world o i l p r i c e s . Between 1972 and 1979 ( t h e y e a r P r e s i d e n t C a r t e r proposed t h e WPT), a g g r e g a t e n e t income a f t e r t a x e s ( a f t e r - t a x p r o f i t s ) of t h e N a t i o n ' s 20 l a r g e s t p e t r o l e u m companies ( s i z e measured by t o t a l s a l e s ) q u i n t u p l e d . This very l a r g e o v e r a l l increase i s a l m o s t e n t i r e l y t h e r e s u l t of s h a r p jumps i n p r o f i t s t h a t o c c u r r e d between 1972 and 1974 and between 1978 and 1 9 7 9 - - i n c r e a s e s of 124 p e r c e n t and 70 p e r c e n t , respectively. One c a n o b s e r v e ( f r o m t h e above c h a n g e s ) t h a t s h a r p g a i n s i n o i l i n d u s t r y p r o f i t s have c o i n c i d e d w i t h p e r i o d s of i n s t a b i l i t y i n t h e world s u p p l y and p r i c e of o i l . Of c o u r s e , p r o f i t i n c r e a s e s i n a l l i n d u s t r i e s d u r i n g t h e l a s t t e n y e a r s r e f l e c t t o some e x t e n t t h e s u b s t a n t i a l r i s e i n t h e g e n e r a l p r i c e l e v e l i n t h e economy; t h e i m p l i c i t p r i c e d e f l a t o r f o r t h e g r o s s n a t i o n a l p r o d u c t r o s e 63 perc e n t between 1972 and 1979. When r e t u r n on a s s e t s f o r t h e 20 l a r g e s t o i l companies i s compared w i t h s i m i l a r d a t a f o r m a n u f a c t u r i n g and f o r l a r g e i n d u s t r i a l f i r m s o v e r t h e l a s t d e c a d e o r s o , however, a mixed p i c t u r e emerges. L a r g e o i l company r e t u r n on a s s e t s f o r 1970 t h r o u g h 1980 (6.56 p e r c e n t ) a v e r a g e s s l i g h t l y l o w e r t h a n t h a t f o r a l l m a n u f a c t u r i n g f i r m s (6.84 p e r c e n t ) , b u t somewhat h i g h e r t h a n t h a t f o r t h e 500 l a r g e s t i n d u s t r i a l companies ( 6 . 0 p e r c e n t ) . p a t t e r n h o l d s f o r 1970-1973 a s f o r 1974-1980. I m p o r t a n t l y , t h e same G e n e r a l l y , r e t u r n s on s a l e s and on a s s e t s g e n e r a t e d by t h e t o p 20 o i l companies f o r 1970-1980 a r e v e r y c l o s e t o t h o s e r e a l i z e d by m a n u f a c t u r i n g f i r m s a s a whole. 2/ D. Domestic P r o d u c t i o n An i m p o r t a n t a s p e c t of t h e d e b a t e on t h e WPT c o n c e r n s t h e d e g r e e t o which d e c o n t r o l of o i l p r i c e s w i l l s t i m u l a t e a d d i t i o n a l p r o d u c t i o n of d o m e s t i c o i l . 2 / These l o n g e r term comparisons mask t h e much h i g h e r o i l company prof i t a b i l i t y d u r i n g p a r t i c u l a r y e a r s t h a t draws p u b l i c a t t e n t i o n . F o r example, r e t u r n on s h a r e h o l d e r s ' e q u i t y i n 1979 f o r t h e o i l companies r e p o r t e d i n Busin e s s Week m a g a z i n e ' s " C o r p o r a t e Scoreboard" was 21.6 p e r c e n t , compared w i t h 16.6 percent f o r a l l i n d u s t r i e s t a l l i e d i n t h e "Scoreboard." ( B u s i n e s s Week, March 1 7 , 1980. p. 1 0 2 , 1 0 3 , 1 1 6 . ) The s t r u c t u r e o f t a x r a t e s a d v o c a t e d n a t u r a l l y depends on p e r c e p t i o n s of how p r i c e i n c r e a s e s w i l l a f f e c t p r o d u c t i o n of i n d i v i d u a l c a t e g o r i e s of o i l ( e . g . , o l d , new, t e r t i a r y ) and o v e r a l l p r o d u c t i o n . These p e r c e p t i o n s , i n t u r n , h i n g e on e s t i m a t e s of t h e p r i c e e l a s t i c i t y o f s u p p l y of d o m e s t i c o i l . E s t i m a t e s of s u c h e l a s t i c i t y r a n g e from a s low a s 0.05 f o r t h e s h o r t r u n (where t h e r e i s i n s u f f i c i e n t t i m e f o r i n v e s t m e n t t o expand c a p a c i t y ) t o around 1 . 0 f o r t h e l o n g ( P r i c e e l a s t i c i t y o f s u p p l y i s t h e r a t i o of t h e p e r c e n t a g e i n c r e a s e i n run. p r o d u c t i o n , b r o u g h t a b o u t by a g i v e n i n c r e a s e i n p r i c e , t o t h e p e r c e n t a g e of that increase i n price.) Thus, a n i n c r e a s e i n s u p p l y of 10 p e r c e n t i n r e s p o n s e t o a 1 0 0 - p e r c e n t i n c r e a s e i n p r i c e i n d i c a t e s a n e l a s t i c i t y of 0.1. Estimates of o i l s u p p l y p r i c e e l a s t i c i t y a r e u n c e r t a i n b e c a u s e o f t h e g r e a t d i v e r s i t y of oil-producing p r o p e r t i e s ( r e g a r d i n g l o c a t i o n , d e p t h and a g e of w e l l s , q u a l i t y o f o i l p r o d u c e d , and o t h e r f a c t o r s ) , t h e l o n g l e a d t i m e s from i n i t i a l e x p l o r a t i o n t o p r o d u c t i o n , and t h e u n c e r t a i n t y of d i s c o v e r y r a t e s and l e v e l s . I n d e b a t i n g t h e p r i c e e l a s t i c i t y of s u p p l y of o i l , however, one s h o u l d b e c o g n i z a n t o f t h e s t r o n g l i k e l i h o o d t h a t d o m e s t i c o i l p r o d u c t i o n w i l l dec l i n e i n t h e l o n g e r t e r m , o r a t b e s t remain s t a b l e . T h e r e f o r e , any .# . ~ncrease" may r e p r e s e n t m e r e l y a s l o w e r d e c l i n e i n p r o d u c t i o n t h a n would o t h e r w i s e o c c u r . E. Use of t h e Revenues C o n s i d e r a t i o n of a new t a x r a i s e s q u e s t i o n s of how t o d i s p o s e of t h e reve- nues. C o n g r e s s i o n a l p r o p o s a l s f o r t h e WPT i n c l u d e d e a r m a r k i n g a l l o r p a r t of t h e f u n d s f o r s p e c i f i c e n e r g y o r non-energy objectives. These o b j e c t i v e s i n - c l u d e d g r e a t e r e n e r g y e f f i c i e n c y , development of a l t e r n a t i v e e n e r g y s o u r c e s , and encouragement of t h e i r u s e , s o f t e n i n g t h e impact of h i g h e r e n e r g y p r i c e s on low-income f a m i l i e s , and s i m p l e placement i n t h e g e n e r a l f u n d . Techniques f o r financing these objectives include t a x c r e d i t s , g r a n t s , low-interest and d i r e c t o u t l a y s f o r goods a:,( s e r v i c e s . loans, The t r u s t fund d e v i c e was t h e most commonly proposed means of a d m i n i s t e r i n g t h e d i s p o s i t i o n of WPT monies. 111. WINDFALL PROFIT TAX CHRONOLOGY A. Initial Enactment President Carter announced his intenrion to propose a windfall profit tax at the same time he presented his decontrol plan (energy message of April 5, 1979), and followed that announcement with a detailed legislative proposal later 3/ that month. - Several other windfall profit tax bills were introducted by mem- bers of Congress. H.R. 3919 (96th Congress), one of the modifications of the President's original proposal, was introduced by Representative Ullman (Chairman of the Ways and Means Committee) on May 3 and passed the House of Representatives on June 28, 1979, as the Crude Oil Windfall Profit Tax Act of 1979. The Senate approved a somewhat different measure on December 17, 1979. Conference Committee issued its compromise report on March 7, 1980. both houses had voted to accept the Conference Report. The By March 27, President Carter signed the Crude Oil Windfall Profit Tax Act into law on April 2, 1980 (as P.L. 96-223). Aside from levying a tax on domestic crude oil, the Act provides a variety of tax incentives for households and businesses to invest in specified kinds of equipment that substitute alternative forms of energy for oil or gas, or that reduce energy use (regardless of the energy source). The Act also contains a few provisions not related to energy. Although the tax was subsequently modified in some respects, the basic form and structure of the so-called windfall profit tax called for in the 1980 Act has not been changed. B. Post-enactment Objections Some of the parties affected by the WPT began to move for changes in or 3 1 Weekly Compilation of Presidential Documents, v. 15, nos 14 and 17, April 9, 1979, and April 30, 1979. p. 609-614, 721-727. CRS- 10 repeal of the law soon after its passage. There have been two main thrusts: (a) complaints by "small" owners and/or operators of oil producing properties, many of modest means, that they should not be subject to the same tax rates as the large oil companies; and ( b ) activities by producer or State organizations aimed at challenging the law itself on constitutional grounds, and/or challenging the manner in which the law is being implemented. C. December 1980 Change The 1980 Act subjected a royalty owner to the W T in the same manner as integrated companies. Moreover, in most cases, royalty interests were not eligible for reduced windfall profit tax rates afforded independent producers. Royalty owners began to feel the impact of the tax on their royalty earnings in April 1980. In late July 1980, the Senate passed an income tax credit (or refund) for oil royalty owners of up to $1,000 against the windfall profit.tax incurred on the removal of oil during calendar year 1980. This action was part of the Senate's First Concurrent Budget Resolution for FY81, and became part of the Omnibus Reconciliation Act of 1980 (P.L. 96-499), enacted December 5, 1980. (The comparable House Resolution did not include such a provision.) 4/ D. Tax Act of 1981 Deliberations over general tax reduction in Spring and Summer 1981 renewed attention to the windfall profit tax. A large number of bills were formulated that would benefit independent oil producers, producers of "newly discovered" oil, and producers of stripper well oil, as well as royalty owners. The most commonly 4 1 Additional discussion and information on the treatment of oil royalty owners under the windfall prof it tax may be found in the following: U.S. Library of Congress. Congressional Research Service. Proposed Changes in the Windfall Profit Tax Treatment of Oil Royalty Owners. Report No. 81-163 E, by Bernard A. Gelb. Washington, 1981; U.S. Library of Congress. Congressional Research Service. Royalty Owners and the Windfall Profit Tax. Mini Brief No. 81243, by Bernard A. Gelb. Washington, updated periodically. CRS- 11 proposed method of reducing the WPT on a producer or royalty o w n e ~was the establishment of an average daily volume of production below which oil would not be subject to the tax. Insofar as windfall profit tax items are concerned, the overall tax package that finally emerged from Congress resembled the House's version of the bill much more closely than the Senate version. extensive WPT reductions than the latter. The former provided for more The overall tax measure, designated the Economic Recovery Tax Act of 1981, was signed into law by President Reagan on August 13, 1981, as P.L. 97-34. E. Legal Challenge On October 14, 1980, a challenge to the originally enacted Windfall Profit Tax Act was filed in the U.S. District Court for the District of Wyoming by the Independent Petroleum Association of America, thirty associations of oil and gas producers and royalty owners, and several individual producers and royalty owners. They cited the following legal issues: (1) because the Act exempts cer- tain crude oil production from Alaska, it violates the Constitutional clause that requires excise taxes to be levied uniformly (interpreted by the courts to mean geographic uniformity); (2) because economic analysis has shown that the tax will decrease domestic oil production, the Act increases (rather than decreases) dependence on foreign oil and, by defeating the purpose of its adoption, fails to provide due process of law; (3) the Act takes private property without just compensation. A motion to dismiss the challenge, filed in December 1980 by the U.S. Department of Justice, was dismissed by the District Court judge on August 26, 1981, after a hearing in June 1981. At this writing, the parties have agreed to bypass a trial of the facts; and each will file, by February 16, 1982, a m o t i o n f o r summary judgment ( o n t h e l e g a l i s s u e s ) i n i t s f a v o r . Responses t o t h e s e m o t i o n s a r e due on A p r i l 1 6 , 1982, two weeks a f t e r which t h e c a s e w i l l be argued i n the D i s t r i c t Court. IV. PROVISIONS OF THE CRUDE OIL WINDFALL PROFIT TAX ACT, AS AMENDED Despite its name, the "Windfall Profit Tax" is not a tax on profit but, in effect, a series of excise taxes imposed on the differences between the selling prices and "base" prices for the various categories of oil under the Act. The tax on oil in each category is calculated by multiplying the tax rate by the difference between the selling price and the base price, and multiplying that amount by the volume of oil produced in that category. The difference between the base price and the selling price is the "windfall profit" (per barrel). The tax is temporary. It became effective March 1, 1980, and is to last about eleven years. More specificially, it is to be phased out over a 33-month period starting in January 1988, or in the month after the cumulative net revenues received as a result of the tax reach $227.3 billion, the revenue target (distinct from the projected yield), whichever is later. But the phaseout will start no later than January 1991; and the tax must end by September 30, 1993, regardless of whether it has raised the targeted $227.3 billion. A. Tax Structure and Rates The structure of the tax is as follows: * Tier One: A 70-percent tax is imposed on all taxable oil except oil specificiaily included in a higher tier (see below). The base price is set at $12.81, adjusted quarterly for inflation (on the basis of the percentage increase in the implicit price deflator for the gross national product since the 2d quarter of 1979). * Tier Two: A 60-percent tax is imposed on "stripper oil" and oil produced from a National Petroleum Reserve in which the U.S. has an economic interest. The base price is $15.20, ad- CRS- 14 j u s t e d f o r q u a l i t y and l o c a t i o n d i f f e r e n c e s , and f o r inf l a t i o n ( a s i n T i e r One). * T i e r T h r e e : A s i n i t i a l l y e n a c t e d , a 30-percent t a x i s imposed on o i l d i s c o v e r e d s i n c e J a n u a r y 1, 1979, c e r t a i n heavy o i l , and incremental t e r t i a r y o i l . The b a s e p r i c e i s $16.55, ad- j u s t e d f o r q u a l i t y and l o c a t i o n d i f f e r e n c e s , and by a f a c t o r e q u a l t o i n f l a t i o n ( a s i n T i e r One) p l u s r o u g h l y 2 percent per year. (More s p e c i f i c a l l y , e a c h q u a r t e r l y i n c r e a s e i n t h e i m p l i c i t p r i c e d e f l a t o r a f t e r September 1979 i s mult i p l i e d by 1 . 0 0 5 . ) A s s u b s e q u e n t l y m o d i f i e d by t h e Tax Act o f 1981, t h e t a x r a t e on newly-discovered o i l i s reduced a c c o r d i n g t o t h e f o l l o w i n g s c h e d u l e : 1982, 27.5 p e r c e n t ; 1983, 25.0 p e r c e n t ; 1984, 22.5 p e r c e n t ; 1985, 20.0 p e r c e n t ; and 1986 and t h e r e a f t e r , 1 5 . 0 p e r c e n t . T h i s b a s i c g e n e r a l s t r u c t u r e i s , however, m o d i f i e d i n t h e o r i g i n a l Act and s u b s e q u e n t C o n g r e s s i o n a l a c t i o n i n a number o f s p e c i f i c r e s p e c t s . Presented h e r e a r e t h e main i t e m s . * I n d e p e n d e n t p r o d u c e r s pay lower r a t e s on t h e i r f i r s t 1 , 0 0 0 d a i l y b a r r e l s of p r o d u c t i o n i n T i e r s One and Two ( 5 0 p e r c e n t i n T i e r One and 30 p e r c e n t on T i e r Two), p r o r a t e d a c c o r d i n g t o t o t a l p r o d u c t i o n i n e a c h c a t e g o r y e l i g i b l e f o r reduced r a t e s . S t a r t i n g i n 1983, a l l s t r i p p e r w e l l o i l p r o d u c t i o n by i n d e p e n d e n t s w i l l be exempt from the tax. T h i s exemption d o e s n o t r e d u c e t h e q u a n t i t y o f o i l e l i g i b l e f o r t h e lower r a t e s . S t r i p p e r o i l c a n n o t q u a l i f y f o r t h e exemption i f i t i s produced from a s t r i p p e r w e l l p r o p e r t y t h a t h a s been owned o n o r a f t e r J u l y 22, 1981 by a non-independent. * C e r t a i n r o y a l t y owners r e c e i v e a t a x c r e d i t ( o r r e f u n d ) of up t o $1,000 a g a i n s t t h e w i n d f a l l p r o f i t t a x on t h e removal of r o y a l t y oil during calendar year 1980, and up to $2,500 for 1981. The credit is available only to individuals, estates, and family farm corporations; it is not available to other corporations or to trusts. For 1982 through 1984, royalty owners' first 2 barrels per day of production are exempted from the tax; their first 3 barrels per day are exempted for 1984 and thereafter. * The windfall profit subject to the tax is reduced by the amount of a State severance tax on the windfall profit. There are restrictions as to the kind and level of severance tax that is applicable. * Alaskan North Slope oil that is produced from the Sadlerochit Reservoir is taxed as Tier One oil, except that the base price may be adjusted upward to reflect decreases in the Trans-Alaska Pipeline System tariff below $6.26 per barrel. Other oil produced north of the Arctic Circle is exempt. * Oil from Indian land is exempt from the tax, as is oil from land owned by State and local governments if the proceeds are used for a public purpose. * The taxable windfall profit on a barrel of oil may not exceed 90 percent of the net income attributable to the barrel. Net income attributable to a barrel generally is determined on the basis of taxable income, but depletion and intangible drilling and development costs must be computed on the basis of cost depletion. * Charitable organizations that are organized and operated primarily for the residential placement, care, or treatment of delinquent, dependent, orphaned, neglected, or handicapped children are exempt from the tax. 51 - 5 / This provision refers to charitable organizations that own oilproducing property. Allocation and Use of Funds As noted in the Introduction, the windfall profit tax was conceived as a mechanism for the redistribution of income and reallocation of resources. But the disposition of the revenues is not provided for in a straightforward manner by the Crude Oil Windfall Profit Tax Act of 1980, although most of the text of the Act deals with the means by which Federal funds are to be devoted to energy and other goals. Most important, the Act neither authorizes nor appropriates the expenditure of expected WPT revenues except for an exceedingly small portion. With this one exception, and that unclear, it only provides that the net revenues 6 / from the windfall profit tax be allocated to a separate account in the Treasury, for accounting purposes only. Without separate specific authorizing and appropri- ating action by Congress, WPT receipts are, in effect, spent along with other general funds in the Treasury. The net revenues allocated to the "account" men- tioned above are to be further allocated to subaccounts for the uses shown below, in the proportions shown: * Income tax reductions -- 60 percent of net revenues; * Aid to lower income families -- * 25 percent of net revenues; Energy and transportation program -- 15 percent of net revenues. The one authorizing action of the Act is for assistance to low income families for heating and cooling costs (see Section E, below). Although not related to the allocation formula, a major thrust of the Act is to enhance Federal encouragement of residential and business energy conservation and of the production and use of alternative energy sources. The Act makes various additions and changes to previously existing devices such as tax 6/ The meaning of "net" revenues is explained in Chapter V. - credits and exemptions. Major items are listed below. The Windfall Profit Tax Act deals with a number of matters other than the so-called windfall profit tax on domestic crude oil. These non-oil tax pro- visions are summarized below. C. Residential Energy Tax Credits * The tax credit for solar, geothermal, and wind energy property is increased to 40 percent of the first $10,000 of expenditures from 30 percent of the first $2,000 and 20 percent of the next $8,000. * Equipment used to generate electricity from the above renewable energy sources is made eligible for the credit. Renewable energy source pro- perty includes installation of solar panels as a roof or part of a roof. * Specific standards are set for the Secretary of the Treasury to apply when he exercises authority to add new items to the list of property eligible for energy tax credits. * Qualified expenditures and the expenditure limits per dwelling are reduced to the extent that property is financed by grants or subsidized energy loans. In cases of joint ownership of two or more dwelling units used as principal residences, the credit is available separately for the expenditure made by each taxpayer. D. Business Energy Tax Incentives * The tax credit for solar, wind, and geothermal energy property is increased from 10 percent to 15 percent for 1980 through 1985, and solar process heat equipment is made eligible; any refundable features are repealed. * The 10-percent investment credit for equipment to produce a solid fuel from biomass is extended from 1982 through 1985; and the 10percent credit for equipment to convert biomass to alcohol for fuel use is extended to 1985 if the primary source of energy for the converting equipment is a substance other than oil, natural gas, or products of oil or natural gas. * Certain intercity bus operators get a 10-percent credit through 1985 for purchases that increase seating capacity. * The existing exemption from the 4-cents-a-gallon excise tax on gasoline allowed blenders of alcohol with gasoline is extended from 1984 to 1992. Where the excise tax exemption does not apply, gasohol blenders are provided an income tax credit of 40 cents for each gallon of alcohol. Other advantages for gasohol are also provided. * Subject to various conditions, producers of certain alternative energy sources get a tax credit of $3 per barrel of oil equivalent, adjusted for inflation; the qualifying sources are oil from shale and tar sands, natural gas from certain nontraditional sources, synthetic fuels (other than alcohol) from coal, gas from biomass, steam from solid agricultural byproducts, and processed wood. * Solid waste disposal facilities eligible for financing with tax-exempt industrial development bonds would include certain property used primarily to convert fuel derived from solid waste into steam as long as such property and that used for collection and processing of the waste is owned by the same person. Interest received on an obligation used to finance a solid waste disposal facility and a related electric energy facility is also tax exempt under certain circumstances. * Interest received on industrial development bonds used to finance renewable energy property is exempted from income tax in States that meet certain legal requirements. CRS- 19 * Small-scale hydroelectric facilities, including those of public utilities, are provided an 11-percent nonrefundable credit. Property is eligible for the credit if the installed capacity of all hydroelectric generating equipment at the site is less than 125 megawatts, and if it is installed at the site of an existing dam (completed before October 18, 1979) or at a new or existing water flow that is not at the site of a dam. * Under certain conditions, tax-exempt industrial development bonds may be used to finance hydroelectric facilities at existing dam sites or at sites where no dam or other water impoundment is involved. * A 10-percent energy credit through 1982 is provided for "cogeneration" equipment added to an existing boiler or burner in which less than 20 percent of the annual fuel consumed is accounted for by oil or natural gas. E. Low-income Energy Assistance * Assistance to lower-income families for heating and cooling costs is provided by means of authorization of $3.0 billion for fiscal year 1981 (through block grants to states under a complex allocation formula). An additional $90 million is authorized for a specified proce- dural contingency. * Additional assistance to lower-income families is purportedly "allocated" (not authorized or appropriated) through the statement of general intent (discussed on page 16). This says that 25 percent of projected net revenues of the W T and one third of any net revenues in excess of the projected amount are for lower-income families. F. Miscellaneous Provisions The Act also includes some provisions that do not pertain to energy or to energy-related concerns. As can be seen in Table 1, three of these provisions have large budget effects. Major items, including the three, follow: * The Act establishes Congressional veto authority, by means of a joint disapproval resolution, over any action taken by the President (such as imposition of fiscal levies or import quotas) to adjust imports of petroleum or its products under the national security provision (sec. 232) of the Trade Expansion Act of 1 9 6 2 . The resolution could be ve- toed by the President, but the veto could be overridden by a two-thirds vote of both Houses. * The existing exclusion of up to $ 1 0 0 in dividends ( $ 2 0 0 for married couples) from income for individval tax purposes was broadened to include interest, and increased to $ 2 0 0 ( $ 4 0 0 for couples). This change would apply to 1 9 8 1 and 1 9 8 2 income taxes. * Taxpayers who liquidate their LIFO 7 / inventories in response to a Department of Energy regulation or request, or to a major foreign trade interruption, may apply for a refund of taxes paid on the LIFO inventory profits of such sale if the liquidated inventory is replenished within three years. * A liquidating corporation (with some exceptions) must recognize the amount of its LIFO recapture as ordinary income. Also, a corporation selling its assets in the course of a 12-month liquidation must recognize the amount of its LIFO recapture as income. 7 / LIFO inventory accounting bases costs of goods sold on the "last-infirstlout" principle; that is, goods acquired last are presumed to have been sold first. V. REVENUE EFFECTS A. Projections At the time of passage of the Crude Oil Windfall Profit Tax Act of 1980, the Joint Committee on Taxation projected that gross collections of the tax would total Sb10.5 billion. But, because the WPT is a deductible item, the windfall profit tax reduces regular corporate income tax receipts below what they would be with decontrol and without the windfall profit tax. This reduc- tion was estimated at $182.8 billion, thus yielding the projected net revenues of $227.7 billion (see Table 1). Other parts of the Act provide for increases in various residential energy tax credits, business energy tax incentives, and other changes in the tax law. In the conference report on the Act, 81 these were projected to cost the Treasury a net of $15.5 billion in the 1980-1990 period. Table 2 summarizes the estimated revenue effects of the broad categories of tax changes in the Act for individual calendar years and for the entire period. The cost to the Treasury of the royalty owner credit of $1,000 for 1980 91 (enacted in December 1980) was estimated at $180 million in reduced revenues. Changes in the windfall profit tax made by the Economic Recovery Tax Act of 1980 are estimated to have a substantial, if not major, impact on revenues from the tax. Over the ten-year period to which the changes will apply, net 81 U.S. Congress. Conference Committees, 1980. Crude Oil Windfall Profit Tax ~ctof 1980; conference report to accompany H.R. 3919. Washington, U.S. Govt. Print. Off., 1980. 180 p. (96th Cong., 2d sess. House. Report 96-817.) 91 U.S. Congress. Conference Committees,l980. Omnibus Reconciliation Act of 1980; conference report to accompany H.R. 7765. Washington, U.S. Govt. Print. Off., 1980. p. 198. (96th Cong., 2d sess. House. Report No. 96-1479.) TABLE 1. E s t i m a t e d Revenue E f f e c t o f t h e O r i -g i n a l Crude O i l W i n d f a l l P r o f i t T a x , C a l e n d a r Y e a r s , 1980-90 ( m i l l i o n s of d o l l a r s ) C a l e n d a r Year L i a b i l i t i e s a / Item Gross w i n d f a l l profit tax Change i n i n come t a x e s Net w i n d f a l l profit tax C a l e n d a r Year L i a b i l i t i e s a / Item - 1986 1987 1988 1939 1990 Total 1979-1990 Gross w i n d f a l l prof i t t a x Change i n i n come t a x e s Net w i n d f a l l profit tax a / Amounts e s t i m a t e d t o b e i n c u r r e d by t a x p a y e r s and owed t o t h e T r e a s u r y a s a r e s u l t of o p e r a t i o n s d u r i n g t h e c a l e n d a r y e a r i n d i c a t e d . b j T o t a l i n c l u d e s a s m a l l amount o f income t a x r e v e n u e e x p e c t e d t o be r a i s e d i n 1979 ( b e c a u s e t h e t a x on n e w l y d i s c o v e r e d o i l r e d u c e r s i n t a n g i b l e d r i l l i n g d e d u c t i o n s t h a t y e a r ) , which i s n o t shown s e p a r a t e l y . NOTE: D e t a i l s may n o t add t o t o t a l s b e c a u s e o f r o u n d i n g . S o u r c e : U.S. C o n g r e s s . C o n f e r e n c e C o m m i t t e e s , 1980. Crude O i l W i n d f a l l P r o f i t Tax Act o f 1980; c o n f ~ r e n c er e p o r t t o accompany H . R . 3919. W a s h i n g t o n , U.S. G o v t . P r i n t . O f f . , 1 9 8 0 . p. 1 6 8 . ( 9 6 t h C o n g . , 2d s e s s . House. R e p o r t No. 9 6 - 8 1 7 . ) CRS- 2 3 Summary o f Revenue E f f e c t s o f t h e O r i g i n a l Crude O i l W i n d f a l l P r o f i t Tax Act o f 1980, A s E s t i m a t e d B e f o r e P a s s a g e of t h e Law ( m i l l i o n s of d o l l a r s ) TABLE 2 . C a l e n d a r Year L i a b i l i t i e s a / ITEM . .... Net g a i n from w i n d f a l l p r o f i t t a x R e s i d e n t i a l energy t a x c r e d i t s Business energy t a x i n c e n t i v e s Repeal c a r r y o v e r b a s i s I n t e r e s t and d i v i d e n d e x l c u s i o n ... I n v o l u n t a r y l i q u i d a t i o n of LIFO inventories Taxing i n v e n t o r y p r o f i t s a t corporate liquidations .... ............ 36 --3 --- 6,306 -4 2 -146 --- 14,719 -53 -232 -36 -2,095 18,875 -69 -329 -95 -2,210 20,147 -97 -864 -163 21,312 -138 -1,182 -238 -85 -80 -- --- -- -- 22,267 -201 -1,541 -330 -- -- -- -- -- 250 250 250 250 33 6,115 12,218 16,337 19,193 20,004 20,445 1986 1987 1988 1989 1990 22,907 Ket g a i n from w i n d f a l l p r o f i t t a x R e s i d e n t i a l energy t a x c r e d i t s -824 B u s i n e s s e n e r g y t a x i n c e n t i v e s .... -440 Repeal c a r r y o v e r b a s i s -I n t e r e s t and d i v i d e n d e x c l u s i o n I n v o l u n t a r y l i q u i d a t i o n of LIFO -inventories Taxing i n v e n t o r y p r o f i t s a t corporate liquidations 250 23,778 .................... ......... TOTAL ............................. ITEM . .... ............ ... .................... ......... TOTAL ............................. -- 21,893 -85 Total 1979-1990 24,588 -- 25,771 27,017 --887 -560 -1,044 -680 -626 -810 -- -- -- -616 -950 -- 227,723 -600 -8,297 -4,302 -4,305 -- -- -- -- -250 250 250 250 250 2,250 22,581 23,114 24,585 25,701 212,219 -- -- a / Amounts e s t i m a t e d t o be i n c u r r e d by t a x p a y e r s (and owed t o t h e T r e a s u r y a s a r e s u l t of o p e r a t i o n s d u r i n g t h e c a l e n d a r y e a r s i n d i c a t e d . b / A s m a l l amount of t a x r e v e n u e s would be r a i s e d i n 1979, b e c a u s e t h e t a x on newly dTscovered o i l r e d u c e s i n t a n g i b l e d r i l l i n g d e d u c t i o n s i n t h a t y e a r . Crude O i l W i n d f a l l p r o f i t S o u r c e : U . S . Congress. Conference Committees, 1980. Tax Act o f 1980; Conference r e p o r t t o accompany H . R . 3919. Washington, U.S. Govt. P r i n t . O f f . , 1980. p. 164-165. ( 1 9 6 t h Cong., 2d s e s s . House. Report No. 96-817.) WPT r e v e n u e s w i l l be an e s t i m a t e d $32.3 b i l l i o n l e s s t h a n o r i g i n a l l y p r o j e c t e d , a s a r e s u l t of t h e 1981 Act ( s e e T a b l e 3 ) . B. C o l l e c t i o n s and C o n t i n g e n c i e s WPT c o l l e c t i o n s c a n n o t be a s c e r t a i n e d u n t i l a t l e a s t s e v e r a l months a f t e r r e c e i p t , and t h e n o n l y i n d i r e c t l y . T h i s i s a consequence of t h e n a t u r e of t h e e x c i s e t a x f i l i n g and r e c o r d i n g system used by t h e I n t e r n a l Revenue S e r v i c e (IRs). Depending upon t h e c a t e g o r y of producer o r p u r c h a s e r , t h e W i n d f a l l P r o f i t Tax Act r e q u i r e s t h e WPT t o be p a i d anywhere from a few d a y s t o two- TABLE 3 . E s t i m a t e d Revenue E f f e c t s of t h e P r o v i s i o n s of t h e Economic Recovery Tax Act of 1981 t h a t R e l a t e t o t h e Crude O i l W i n d f a l l P r o f i t Tax ( b i l l i o n s of d o l l a r s ) C a l e n d a r Years Provision $2,500 r o y a l t y c r e d i t f o r 1981; p a r t i a l exemption f o r 1982 and, t h e r e a f t e r -0.5 -0.9 -1.0 -1.0 -1.3 -1.3 -0.7 -0.7 -0.8 -0.8 Reduction of t a x on newly discovered o i l Exempt i n d e p e n d e n t producer s t r i p p e r well o i l Exempt c h i l d c a r e a g e n c i e s TOTAL TOTAL a/ - -- -- a/ a/ a/ a1 a/ a/ 0.5 1.0 2.0 2.3 3.0 3.9 1987 - 1988 - 1989 - 1990 - Total 1981-1990 4.3 4.7 5.1 5.4 32.3 $15 m i l l i o n . Notes: Data f a r i n d i v i d u a l p r o v i s i o n s a r e n o t a v a i l a b l e f o r 1987 t h r o u g h 1990. D e t a i l s may n o t add t o t o t a l s due t o r o u n d i n g . Source: ~ o i n Committee t on T a x a t i o n , U . S . Congress. Telephone communication. and-a-half months a f t e r removal of o i l from a p r o p e r t y . As i s t h e c a s e w i t h a l l e x c i s e t a x e s , however, t h e documentation t h a t accompanies WPT payments does n o t i d e n t i f y t h e s p e c i f i c t a x b e i n g p a i d ; moreover, such payments can b e , and a r e , combined w i t h payments o f o t h e r e x c i s e t a x e s . The Q u a r t e r l y E x c i s e Tax R e t u r n s , f i l e d two months a f t e r t h e end of t h e q u a r t e r t o which t h e y pert a i n , do i d e n t i f y each t y p e of t a x , b u t r e f l e c t l i a b i l i t i e s r a t h e r t h a n c o l lections. A W i n d f a l l P r o f i t Tax form, which shows how t h e i n c u r r e d t a x h a s been computed and when payments were made, i s f i l e d w i t h t h e Q u a r t e r l y E x c i s e Tax R e t u r n . But b e c a u s e of d i f f e r e n c e s i n t i m i n g , some d e p o s i t s i n payment of a p o r t i o n of l i a b i l i t i e s i n c u r r e d i n one c a l e n d a r q u a r t e r a r e made i n t h e succeeding q u a r t e r . The presumed " f i n a l 1 ' a c c o u n t i n g f o r w i n d f a l l p r o f i t t a x l i a b i l i t y and payment by a p a r t i c u l a r t a x p a y e r may n o t even o c c u r when t h e t a x p a y i n g e n t i t y f i l e s i t s r e g u l a r a n n u a l t a x r e t u r n two-and-a-half months a f t e r t h e end of i t s f i s c a l y e a r . Because of t h e s e d i f f i c u l t i e s i n r e l a t i n g c o l l e c t i o n s t o l i a b i l i t i e s , IRS a c c o u n t i n g f o r t h e WPT i s based on l i a b i l i t i e s t h a t a r e r e p o r t e d on t h e Quart e r l y E x c i s e Tax R e t u r n . Moreover, t h e a v a i l a b i l i t y o f t h e i n f o r m a t i o n on t h e s e forms i s d e l a y e d by t h e time needed t o p r o c e s s and r e c o r d t h e d a t a a s w e l l a s by t h e gap between t h e end of t h e r e s p e c t i v e c a l e n d a r q u a r t e r s and t h e d a t e s when t h e r e t u r n s a r e f i l e d . Based upon d a t a from t h i s i m p e r f e c t i n f o r m a t i o n p r o c e s s i n g system and t a k i n g i n t o a c c o u n t t h e gaps b u i l t i n t o i t , r e v e n u e s a p p e a r t o be coming i n t o t h e F e d e r a l t r e a s u r y a t r o u g h l y t h e same r a t e p r o j e c t e d i n t h e C o n f e r e n c e Report. When e n a c t e d , t h e t a x was p r o j e c t e d t o y i e l d $10.9 b i l l i o n i n g r o s s l i a b i l i t i e s i n c a l e n d a r y e a r 1980. Gross l i a b i l i t i e s r e c o r d e d from March 1 , 1980 (when t h e t a x became e f f e c t i v e ) t h r o u g h A p r i l 3 0 , 1981, amounted t o $ 8 . 9 billion. T h i s f i g u r e r o u g h l y r e f l e c t s WPT l i a b i l i t i e s r e p o r t e d f o r p e r i o d s through the quarter ending December 31, 1980; it necessarily excludes 1980 liabilities that will be reported in later returns. A special tabulation by IRS based on liability quarters shows that gross WPT liabilities for calendar year 1980 were $9.9 billion (see Table 4). The Treasury Department has esti- mated that gross WPT revenues in calendar year 1980 totalled $10.0 billion. TABLE 4. Windfall Profit Tax Liability, Calendar Year 1980 (millions of dollars) Liability Quarter Ending Liability After Adjustments March 1980 b/ a/ 788 June 1980 2,821 September 1980 December 1980 TOTAL a/ Data for each quarter also reflect deductions from, or additions to, lyabilities incurred in that quarter to adjust for overwithholding or underwithholding in one or more previous quarters. b/ - The windfall profit tax took effect March 1, 1980. NOTE: Not all of the windfall profit tax liability for a given quarters is deposited in that quarter, because of varying deposit rules. Source: U.S. Department of the Treasury. Internal Revenue Service. Statistics of Income Bulletin. v. 1, no. 2 all 1981). p. 50. Present and possible future softness in demand for petroleum products does not, at this point, threaten a substantial shortfall of future WPT revenues below projected levels. Decreases in domestic demand for oil result almost entirely in reductions in imports in petroleum rather than in domestic production (which is the base of WPT revenues). Some analysts believe that forecasts of domestic crude oil production made in early 1980 may have been moderately optimistic; but a moderate "shortfall" in production will almost certainly be offset by the considerable increase in oil prices that has curred since the 1980 projections were made. OC- The present softness in world oil prices may be eliminated by the recent Saudi Arabian decision to reduce its crude oil producticn by about 1.5 million barrels per day. (This decision followed the agreement by the Organization of Petroleum Exporting Countries to "'unify"prices. ) Another uncertainty is how much additional windfall profit tax revenue may result from improvements now being planned in the management of oil royalty collections from Federal lands. SELECTED REFERENCES Oil Daily (editors). The "windfall profits" tax: the price for decontrol. New York, The Oil Daily, December 1980. 247 p. Phelps, Charles E. and Rodney T. Smith. Petroleum regulation: the false dilemma of decontrol. Santa Monica, California, The Rand Corporation, January 1977. U.S. Library of Congress. Congressional Research Service. Tax provisions and effective tax rates in the oil and gas industry. Report No. 77-238 E, by Jane Gravelle. Washington, 1977. 42 p. ----- Congressional Research Service. Proposed changes in the windfall profit tax treatment of oil royalty owners. Report No. 81-163, by Bernard A. Gelb. Washington, 1981. 21 p. ----- congressional Research Service. The uniformity requirement in federal taxation. Memorandum, by Howard Zaritsky, January 5, 1978. Washington, 1978. 8 p. U.S. Congress. Conference Committees, 1980. Omnibus Reconciliation Act of 1980; conference report. House Report No. 96-1477, 96th Cong., 2d Sess. Washington, U.S. Govt. Print. Off., 1980. 204 p. U.S. President, 1981(Reagan). Allocation of windfall profit tax revenues; communication transmitting the proposed allocation of the net revenues expected under the crude oil windfall profit tax of 1980, pursuant to Section 102 (d) of the Act. House Document No. 96-343, 96th Cong. 2d Sess. Washington, U.S. Govt. Print. Off., 1980. U.S. Congress. Conference Committees, 1980. Crude Oil Windfall Profit Tax Act of 1980; conference report. House Report No. 96-817, 96th Cong., 2d Sess. Washington, U.S. Govt. Print. Off., 1980. 180 p. ----- House. Committee on Government Operations. IRS administration of the windfall profit tax and U.S. geological survey's oil and gas royalty collection activities. Hearings, 97th Cong., 1st Sess., April 13, 1981. Washington, U.S. Govt. Print. Off., 1981. ----- Joint Committee on Taxation. The design of a windfall profit tax. Joint Committee Print, 96th Cong., 1st Sess. Washington, U.S. Govt. Print. Off., 1979. 43 p. ----- Joint Committee on Taxation. Summary of H.R. 4242 - the economic recovery tax act of 1981. Joint Committee Print, 97th Cong., 2d Sess. Washington, U.S. Govt. Print. Off., 1981. ----- Senate. Committee on Finance. Economic recovery act of 1981. Senate Report No. 97-144, 97th Cong., 1st Sess. Washington, U.S. Govt. Print. Off., 1981. 191 p. Energy excise taxes as substitutes for income taxes. Wetzler, James W. National Tax Journal, v. XXXIII, No. 3, September 1980: 321-329.