Biden’s “Windfall Profits Tax” On Oil Companies Would Give Voters What They Want—And That’s The Problem

Earlier this week at a press conference in the Roosevelt Room of the White House, President Joe Biden chastised oil companies for profiting off of the current high gas prices. Standing alongside Treasury Secretary Janet Yellen and Energy Secretary Jennifer Granholm, he took the additional step of threatening to impose a windfall tax on their corporate profits. Biden surely knows the chances of such a tax passing Congress are slim, but with an election less than a week away and Democrats facing headwinds from consumers anxious about inflation, he’s ramping up the voter-pleasing rhetoric.

Politicians devote a disproportionate amount of time to the issue of high gas prices, especially ahead of elections. As my George Mason University colleague Professor Garett Jones likes to point out, it’s the “median voter theorem” that helps explain this behavior. The theorem states that politicians will tend to embrace the policy positions of the middling voter. Since the middling American voter cares a lot about gas prices, it follows that politicians will care too.

This simple explanation shows why my home state of Maryland was the first state in the nation to temporarily suspend its gas tax when oil prices surged following Russia’s invasion of Ukraine. Other states quickly followed suit. Though this seems squarely at odds with blue-state priorities, such as reducing carbon dioxide emissions, it’s easy to understand in light of the median voter theorem.

According to the Environmental Protection Agency, 27% of U.S. greenhouse gas emissions come from the transportation sector. In response, the Biden Administration is subsidizing electric vehicle (EV) purchases and encouraging domestic production of EV components and minerals. It doesn’t take a genius to see that reducing gas prices works at cross-purposes with these policies. Cheaper gasoline means more competition for EVs, and more emissions than would otherwise occur.

Then there’s the fact that a windfall profits tax wouldn’t even help consumers much, since some of the tax will inevitably be passed onto them at the pump. That may actually be good from the standpoint of climate change, but it’s not consistent with Biden’s stated goal of bringing down gas prices.

There are other problems with a windfall tax. Since it would fall on companies that do business in America, it could encourage more imports of foreign oil. There is currently a ban in place on Russian petroleum, but loopholes are leading Americans to consume it anyway. This is undermining America’s foreign policy objectives, and a windfall profits tax could exacerbate the problem.

These kinds of taxes have also been tried before. A similar tax was imposed in 1980 before later being repealed. It was considered overly-complicated, and it raised less revenue than expected. It’s also notable that the Trump Administration just lowered the corporate tax rate from 35 to 21% in 2017. Democrats had the opportunity to reverse the change when they took control of the White House and Congress. As of yet they haven’t done it—perhaps further evidence of the median voter theorem at work.

If our leaders are going to offer more consistent energy policy, at some point they will have to confront the median voter. For example, many economists endorse carbon taxes as a means to reduce emissions. Consumption taxes levied at the point of sale of goods and services would also motivate Americans to contribute less to pollution. Both of these policies could encourage a faster transition to cleaner energy sources, without discouraging investment the way corporate taxes do. But they would also involve higher gas prices, and therefore aggravate the median voter.

Professor Jones likes to argue that what the country needs is 10% less democracy, thereby moderating the influence of the median voter somewhat. The views of the middling voter aren’t always problematic. But when it comes to gas prices, a little less democracy might be exactly the policy prescription that is needed.