After big windfall for energy companies, Ohio economists divided on profits tax

Ohio oil and gas taxes exceptionally low among major energy states

By: - August 22, 2022 3:50 am

(Getty Images illustration).

Is it a good idea to tax energy companies on all the barrels of extra cash they made off of this year’s high prices? A panel of Ohio economists is divided.

As of last Monday, gasoline prices in the United States had fallen every day for the past nine weeks.

However, energy economists warn, events such as a destructive hurricane in the Houston Ship Channel can stall transportation and refining and send them right back up. 

In addition, the decrease in prices isn’t all good news. Part of the price drop has been attributed to the harm caused by the inflation that $5 gas contributed to — a phenomenon known as “demand destruction” as people drove less because they couldn’t pay higher prices for gas, food and a lot of other stuff.

While the high prices have been hard on average Americans, they’ve been great for oil companies. Exxon, for example, last month reported record profits on nearly $18 billion in revenue for the three months ending in June.

That has some politicians advocating that the companies that got so much from spiking gas prices be forced to share the wealth with people harmed by them. For example, U.S. Senate Finance Committee Chairman Ron Wyden, D-Ore., in June proposed a 21% windfall profits tax on oil company profits over 10%.

Certainly, oil and gas producers in Ohio have been taxed at a low rate compared to other states.

States use many different mechanisms to tax oil and gas production and comparisons of how heavily they’re taxing it can be hard to come by. But a 2016 analysis of taxes in 2013 by researchers at the University of Michigan and the National Bureau of Economic Research showed that Ohio producers were getting off remarkably easily.

Of the top 16 oil-and-gas producing states, Ohio’s taxes were the lowest — by a lot. While the average government “take” was about 10% of total production value, Ohio’s was about 1%. That was less than half that of the next-lowest state, Arkansas, and a little more than one-fortieth of the highest state, Alaska, the report said.

So, with production taxes in Ohio low, and energy companies turning record profits, a panel of 26 Ohio economists was asked last week if a windfall profits tax would be a good idea if its proceeds were rebated back to households. Just over half — 15 — said they believed that it was.

Interestingly, independent economist Kay E. Strong said that rebating the windfall tax to households wasn’t a good idea for the same reason that Dean Snyder of Antioch College said that it was. Both wrote in the comments section of the survey that the mere threat of a windfall tax would prompt oil companies to lower prices. In fact, oil giant Total had already done it in France, Snyder wrote.

Strong wrote that instead of rebating the revenue to households, it would be better to invest those funds in green energy.

Diane Monaco of Heidelberg University made a similar point. She argued that a windfall tax would reduce oil and gas production as it did in 1980, but unlike then, alternative sources of energy are available now.

Along with incentives in the Inflation Reduction Act President Joe Biden signed into law earlier this month, a windfall profits tax would help to enhance the environment, an asset we hold in common, Monaco said.

“Consumer benefits will help consumers cut utility costs, increase their use of (electric vehicles), and energy-efficient home utilization; thus, overall reducing the amount of toxins in the environment,” she wrote.

On the other hand, Michael Jones of the University of Cincinnati wrote that a windfall profits tax would just make gas more expensive.

“The best way to combat rising energy costs is to lower the cost of energy production,” he wrote. “A windfall tax does the opposite. A tax makes it more expensive, not less expensive, to supply energy to the market.”

While he agreed with the idea of levying a windfall tax and rebating it to consumers, Kevin Egan of the University of Toledo advocated imposing market principals on the consolidated, subsidized world of fossil fuel production.

“I would prefer all subsidies that support all fossil fuels were eliminated and antitrust laws enforced so no one company has too much market power,” he wrote.

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Marty Schladen
Marty Schladen

Marty Schladen has been a reporter for decades, working in Indiana, Texas and other places before returning to his native Ohio to work at The Columbus Dispatch in 2017. He's won state and national journalism awards for investigations into utility regulation, public corruption, the environment, prescription drug spending and other matters.