Crude Oil Windfall Profit Tax, 1985 By Edward Chung* Crude oil windfall profit tax (after $227.3 billion in net revenue (see the adjustments) for the fourth quarter of 1985 was Definitions) will have been realized by then; $1.0 billion. This was the lowest amount of otherwise, no later than January 1991 [1]. windfall profit tax reported since the first full quarter (June 1980) for which the tax was The formula to calculate the "windfal 1 reported. The total reported windfall profit profit" (WP) is: tax after adjustments since the enactment of the Crude Oil Windfall Profit Tax Act of 1980 WP = RP - (ABP + SST) amounted to almost $78 billion through December 1985. where: RP = Removal The Crude Oil Wi ndf al l Prof it Tax Act Price ABP = Adjusted imposed a Federal excise tax crude Base Price on domestic SST = State oil extracted on or after March 1, 1980. The Severance Tax Adjustment tax was enacted in response to the planned phaseout of Government price controls on The windfall profit declined from a high of domestic crude oil. The Act was intended to tax $11.9 billion for the quarter ending June 1981 a fair share of the additional revenues to $1.6 billion for the quarter ending December received by oil producers and royalty owners as 1985 (Figure A) [2]. This decrease was a a result of oil price decontrol, yet not result of declines in the "removal price" adversely affect domestic production. Congress (generally the price for which oil is sold) and designated the windfall profit tax to be rises in the "adjusted base price" and State temporary, with a 33-month gradual phaseout. severance tax adjustment (see the Definitions This phaseout will begin in January 1988, if at the end of this article). Figure A Components of windfall Profit Tax LiablItty BefGre Adjustments: Aggregate Valuea By Quatier Oil R*Mved, 19WJWS' 6,Mon. of Dolt~ After Full Decontrol Adjusted Base Value Removal Value Plus State Severance . - -j-T-U Wt~dtall Profit Tax Liability i Before Adjustments .............................. ........i...... I .......... I ......... ........ I f I I I I I --* I I I I ..........I.........I.........i .........IF....... ~T ....... I marw W80 Soo&) 9-oo J-31 S~p6i DWSI MIWEL2 An82 SapS2 DecU M&ra3 k~ 6J -'4p83 DW63 MariA J-FA S"64T DQC&4 NW115 "85 SopaS 0~85 Ouarter OW Removed 'Some Mk" rWPW ~JaA ~W~ t*A kkd~A~ -6, tl~e(ow data for rwnovel value, &**ted be" ~akm " state "vw wt* " # at "ourre .pww tas jw ;o(V Mond) only, *Foreign Special Projects Section. Prepared with the assistance of Patricia Slaughter under the direction of Michael Alexander, Chief. 85 86 Crude Oil Windfall Profit Tax, 1985 Since June 1981, when the average removal price for domestic crude oil was at its height, the removal price had fallen by almost 23 Fioure C percent, from $33.09 to $25.43 per barrel for Windfall Profit Tax Liability After the quarter ending December 1985 (Figure B). Adjustments by Year, 1980-1985 The total windfall tax liability reported (after adjustments) for Calendar - Years 1980-1985 totalled $77.8 billion. Of the total tax, 1981 accounted for the largest proportion (33 percent) and 1985 the lowest (7 percent)--a decline from 1981 to 1985 of 78 percent (Figure C). Some returns report windfall profit tax only; therefore, data for removal value, adjusted base value, State severance tax, and the resulting windfall profit have been adjusted to account for the missing detail. Concomitant with this decline in ' tax liabilities was a decrease in reported windfall profit of 78 percent from 1981 to 1985. The immediate cause for falling profits was the combined effect of declining removal price (down by 36 percent from 1981) accompanied by a 1 percent growth in the sum of the adjusted base value and State severance tax .(Figure D). The adjusted base price increased chiefly as a result of a required inflation adjustment derived from . the Gross National Product (GNP) -i mp11-ci-t-p.ri-ce-d.etl-ato.r-[-aI Figure B Components of Windfall.Profit Tax Liability: Averages per Barrel by Quarter Oil Removed, 1980-1985 ,If '11 ["'' Adjusted Base Price And State Severance Tax Adjustment Tax Liability ........................................ ....................... I ............. I ........ ........................................................................................ ..... Prior to Full Decontrol After Full Decontrol I I D-B" Ma P3 J~ B3 B3 D-9.3 W164 ~~64 S~pl~l D-84 M118-5 J-6.5 Snp 65 M~EV J-60 _I'PB0 Deca; J-8, SeP81 D0081 M18-2 J,MB2 ~3W NOTE &-aLW Of WM COMR43 dU" 19W- U~We 'vam casea `v'~ tn~ 'emc' ,,justed base price and M Form 6047 was M49d. ThO data M the Nura an . Figure D Components of Windfall Profit Tax Liability After Adjustments, 1WO-Im" Billions of Dollars .100 92.7 83.1 80 " 73.4 70- 68.4 60- 52.3 53.3 52.7 53.7 48.1 50- 48.9 L43.8 L~4.9 40- L~0.8 30- P~2 25.9 21.9 19.9 20- 16.7 Ll 5.8 9.9 10.7 87 10~- 89 ~ 5.6 1980 1981 1982 1983 1984 1985 Year Oil Removed 1 Some returns report windfall profit tax liability only, therefore, data for removal Value. adjusted base value and state severance tax adjustment have been adjuste~ to reflect totals as if all returns reported this detail. 2 Represents only 10 months. Adjusted Base Value Tax Liability-After Removal Value And State Severance Windfall Profit Tax Adjustment Adjustments 88 . Crude Oil Windfall Profit Tax, 1985 Figure E is a summary, by quarter, of tax Adjustments to tax, fourth quarter 1985 liability before and after adjustments since (Millions) the tax went into effect in 1980, as shown on windfall profit tax returns. The adjustments Net income limitation -$190 were necessary because of errors by withholding Prior quarters - -19 agents during previous quarters or, more Total Adjustments -$209 frequently, because of application of the net income limitation. Based on returns of taxpayers that provided complete detail on the windfall profit tax computation [4], "tier one oil" continued to Figure E--Windfall Profit Tax Before and After dominate production for the quarter ending Adjustments December 1985. Tier one oil (all domestically [Millions of dollars] produced crude oil other than oil specifically classified as tier two or tier three, or oil Quarter Tax Before Total Tax After explicitly exempted from the tax) represented Ending Adjustments Adjustments Adjustments 46 percent of total production. "Tier two oil," which represented 11 percent of total Total ...... $83,668 -$5,911 $77,757 production, is oil produced from stripper well property not qualifying for the stripper Mar. 19801.,.. 788 - 788 exemption and oil from economic interests in a June 1980 ... 2,842 -21 2,821 Naval Petroleum Reserve held by the United Sept. 1980 ... 3,413 -88 3,325 States. "Tier three oil," which is heavy oil, Dec. 1980 3,918 -927 2,991- incremental tertiary oil and newly discovered Mar. 1981 6,953 +242 7,195 oil (the latter represented 53 percent of tier June 1981 ... 7,253 -107 7,146 three oil), accounted for 43 percent of total Sept. 1981 ... 6,344 -251 6,093 production (Figure F). Since the inception of Dec. 1981 ... 6,007 -497. 5,510 the tax, tier three oil, which is generally Mar. 1982 ...' 5,222 -221 5,001 taxed at a rate lower than tier one oil, has June 1982 ... 4,283 -295 3,988 accounted for a steadily increasing percentage -Sep_t.-_1_98L._._._4.,_4O_4-,-445-3,959 -of-tota-l-production. Dec. 1982 ... 4,440 -634 3,806 Mar.. 1983 ... 3,320 -193 3,127 June 1983 ... 2,951 -203 2,748 DATA SOURCES AND LIMITATIONS Sept. 1983 ... 2,822 -300 2,522 Dec. 1983 ... 2,736 -465 2,271 The windfall profit tax is reported on the Mar. 1984 ... 2,622 -228 2,394 Quarterly Federal Excise Tax Return, Form 720. June 1984 ... ~2,468 -218 2,250 Form 6047, Windfall Profit Tax, shows how the Sept. 1984 ... 2,447 -200 2,247 tax is computed and is filed as an attachment Dec. 1984 ... .-2,236 -256 1,980 to Form 720. Tabulations in this article are Mar. 1985 ... 1,850 -117 1,733 based on the Forms 6047 reporting a tax June 1985 ... 1,653 -132 1,5;21 liability. Therefore, total -domestic taxable Sept. 1985 ... 1,442 -146 1,296 production will be somewhat understated. Dec. 1985 ... 1,254 -209 1,045 Returns are due 2 months after the end of the quarter in which the oil-is removed. Data are based on all returns with a tax liability of $1 lOne month only. million or more before adjustments and a 10-percent sample of all other returns. Sampling and The . net i ncome. limitation generated an nonsampling error was' controlled adjustment bec ause it limits the windfall by a variety of methods. Although efforts were profit to 90 percent of the net income per made to secure missing returns, some returns barrel of oil and was estimated by certain may have been omitted because of time and other taxpayers for the current quarter ending statistical processing constraints. Attempts. December 1985. The adjustments to the previous were made to correct imbalances in taxpayer quarter were 'for under- or over-withholding entries for the components of windfall profit. from previous quarters that the depositing or If this proved impossible, an out-of-balance withholding agent (usually the first purchaser) -eturn was treated as a return on which the corrected by adjusting.the amounts withheld in components were not reported, and therefore succeeding quarters.