Crude Oil Windfall Profit Tax Act of 1980 (WPT)

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Crude Oil Windfall Profit Tax Act of 1980 (WPT)


By: United States Congress

Date: April 2, 1980

Source: U.S. Congress. "Crude Oil Windfall Profit Tax Act of 1980." Washington, D.C.: 1980.

About the Author: The Congress of the United States was established by Article 1 of the U.S. Constitution of 1787. It is the legislative arm of the U.S. Federal Government.


The Crude Oil Windfall Profit Tax Act (U.S. Public Law 96-223) was enacted in 1980 in response to sharp oil price increases during the 1970s. Implementation was expensive and revenue was consistently below expectations, so the tax was repealed in 1988. The word "windfall" originally referred to fruit blown from trees by the wind, which could be easily collected from the ground. Its use evolved to describe any kind of economic godsend or good fortune, and the term "windfall profit" is often used in a manner that implies undeserved good fortune.

The early 1970s was a time of high inflation rates and rising consumer prices in the United States. At the time, the United States was importing about one-third of its oil supply and domestic oil exploration had decreased because it was in many cases less expensive to import oil than produce it from American oilfields. The early 1970s also marked the emergence of the Organization of Petroleum Exporting Countries (OPEC), which had been founded in 1960 to assert the rights of petroleum-producing countries in the international oil market. At the time OPEC was founded, international oil production and prices were dominated by a group of multinational companies known as the Seven Sisters (Exxon, Mobil, Chevron, Texaco, Gulf, British Petroleum, and Royal Dutch/Shell). The stated intentions of OPEC were to coordinate oil policy among its members, ensure fair and stable oil prices (and therefore revenue) for its members, provide an efficient and steady supply to oil-importing countries, and offer fair returns to oil investors. It is commonly considered to be a cartel, which is an organization that maintains prices at high levels by restricting the supply of its products. The OPEC member countries are Algeria, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the United Arab Emirates, and Venezuela. Ecuador was a member from 1973 to 1992 and Gabon was a member from 1975 to 1994. Major oil-producing countries that are not members of OPEC include the United States, Mexico, Russia, Norway, and Great Britain.

After a failed Egyptian and Syrian invasion of Israel on the Jewish holy day of Yom Kippur in October 1973, OPEC imposed a complete oil embargo on the United States and raised prices for European countries from $3.00 to $5.11 per barrel in retaliation for their support of Israel. Three months later OPEC raised the price to $11.65 per barrel. As a consequence of the international price increases and the OPEC embargo against the United States (often referred to as the Arab oil embargo in reference to the OPEC membership), gasoline prices quadrupled from 30 cents per gallon to as much as $1.20 per gallon. Gasoline was in short supply, causing long waits at gas stations. President Nixon banned Sunday gasoline sales and extended daylight savings time to stimulate energy conservation. Congress also approved construction of the Trans-Alaskan Pipeline to transport crude oil from the North Slope of Alaska to the port of Valdez, where it could be transferred to tankers bound for the lower forty-eight states.

Although oil company profits increased substantially as a result of the OPEC embargo and price increases, the overall economy fell into a recession. The Dow Jones Industrial Average, which reflects the prices of a broad range of stocks, fell from 1,051 in January of 1973 to 577 in December of 1974. A second and even larger global oil price increase occurred during the Iranian Revolution of 1979. The Crude Oil Windfall Profit Tax Act was passed as a response to increasing oil-company profits at a time when the remainder of the United States economy was struggling. The tax was complicated, with rates depending on the size of the company to which it was being applied, the type of oil, the age of the well from which the oil was produced, and the amount of oil produced by the well each day. It was also based on the difference between a 1979 base price of oil and the current market price, with annual adjustments for inflation.

The Crude Oil Windfall Profit Tax Act was repealed in 1988 because it was expensive to implement and its revenues never met expectations. Worldwide oil supplies from non-OPEC countries had increased, for example from Alaska and the North Sea (the latter controlled by Norway and Great Britain) and, although they never reached the pre-embargo prices of the early 1970s, prices began to fall sharply in 1981 and plummeted even more sharply in 1986. New technologies and higher prices also allowed increased production from newly discovered oilfields in areas such as the Gulf of Mexico. Although oil prices had fallen below the inflation-adjusted 1979 base price, oil producers and purchasers remained obligated to keep records and file tax reports. The federal government also incurred the expense of overseeing a tax program that produced no revenues.


PL 96-223 (HR 3919)

APRIL 2, 1980

An Act to impose a windfall profit tax on domestic crude oil, and for other purposes.

Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled,


(a) Short Title.—This Act // 26 USC 1 // may be cited as the "Crude OIL Windfall Profit Tax Act of 1980."


"SEC. 4986. // 26 USC 4986. // IMPOSITION OF TAX.

"(a) Imposition of Tax.—An excise tax is hereby imposed on the windfall profit from taxable crude oil removed from the premises during each taxable period.

"(b) Tax Paid by Producer.—The tax imposed by this section shall be paid by the producer of the crude oil.

"SEC. 4987. // 26 USC 4987. // AMOUNT OF TAX.

"(a) In General.—The amount of tax imposed by section 4986 with respect to any barrel of taxable crude oil shall be the applicable percentage of the windfall profit on such barrel.

"(b) Applicable Percentage.—For purposes of subsection (a)—,

"(1) General rule for tiers 1 and 2.—The applicable percentage for tier 1 oil and tier 2 oil which is not independent producer oil is—,Tier 1: 70; Tier 2: 60.

"(2) Independent producer oil.—The applicable percentage for independent producer oil which is tier 1 oil or tier 2 oil is—,Tier 1: 50; Tier 2: 30.

"(3) Tier 3 oil.—The applicable percentage for tier 3 oil is 30 percent.

"(c) Fractional Part of Barrel.—In the case of a fraction of a barrel, the tax imposed by section 4986 shall be the same fraction of the amount of such tax imposed on the whole barrel.


"(a) General Rule.—For purposes of this chapter, the term 'windfall profit' means the excess of the removal price of the barrel of crude oil over the sum of—,

"(1) the adjusted base price of such barrel, and

"(2) the amount of the severance tax adjustment with respect to such barrel provided by section 4996(c).

"(b) Net Income Limitation on Windfall Profit.—,

"(1) In general.—The windfall profit on any barrel of crude oil shall not exceed 90 percent of the net income attributable to such barrel.

"(2) Determination of net income.—For purposes of paragraph (1), the net income attributable to a barrel shall be determined by dividing—, (A) the taxable income from the property for the taxable year attributable to taxable crude oil, by (B) the number of barrels of taxable crude oil from such property taken into account for such taxable year.

"(3) Taxable income from the property.—For purposes of paragraph (2)—, (A) In general.—Except as otherwise proviced in this paragraph, the taxable income from the property shall be determined under section 613(a).

// 26 USC 613. //

"(B) Certain deductions not allowed.—No deduction shall be allowed for—,

"(i) depletion,

"(ii) the tax imposed by section 4986,

"(iii) section 263(c)

// 26 USC 263. // costs, or

"(iv) qualified tertiary injectant expenses to which an election under subparagraph (E) applies.

"(C) Taxable income reduced by cost depletion.—Taxable income shall be reduced by the cost depletion which would have been allowable for the taxable year with respect to the property if—,

"(i) all—,

"(I) section 263(c) costs, and

"(Ii) qualified tertiary injectant expenses to which an election under subparagraph (E) applies, incurred by the taxpayer had been capitalized and taken into account in computing cost depletion, and

"(ii) cost depletion had been used by the taxpayer with respect to such property for all taxable periods.

"(D) Section 263(c) costs.—For purposes of this paragraph, the term 'section 263(c) costs' means intangible drilling and development costs incurred by the taxpayer which (by reason of an election under section 263(c)) may be deducted as expenses for purposes of this title (other than this paragraph). Such term shall not include costs incurred in drilling a nonproductive well.

"(E) Election to capitalize qualified tertiary injectant expenses.—,

"(i) In general.—Any taxpayer may elect, with respect to any property, to capitalize qualified tertiary injectant expenses for purposes of this paragraph. Any such election shall apply to all qualified tertiary injectant expenses allocable to the property for which the election is made, and may be revoked only with the consent of the Secretary. Any such election shall be made at such time and in such manner as the Secretary shall by regulations prescribe.

"(ii) Qualified tertiary injectant expenses.—The term 'qualified tertiary injectant expenses' means any expense allowable as a deduction under section 193.

"(4) Special rule for applying paragraph (3)(c) to certain transfers of proven oil or gas properties.—,

"(A) In general.—In the case of any proven oil or gas property transfer which (but for this subparagraph), would result in an increase in the amount determined under paragraph (3)(C) with respect to the transferee, paragraph (3)(C) shall be applied with respect to the transferee by taking into account only those amounts which would have been allowable with respect to the transferor under paragraph (3)(C) and those costs incurred during periods after such transfer.

"(B) Proven oil or gas property transfer.—For purposes of subparagraph (A), the term 'proven oil or gas property transfer' means any transfer (including the subleasing of a lease or the creation of a production payment which gives the transferee an economic interest in the property) after 1978 of an interest (including an interest in a partnership or trust) in any proven oil or gas property (within the meaning of section 613 A)(c)(9)(A)).

// 26 USC 613 A. // "(5) Special rule where there is production payment.—For purposes of paragraph (2), if any portion of the taxable crude oil removed from the property is applied in discharge of a production payment, the gross income from such portion shall be included in the gross income from the property of both the person holding such production payment and the person holding the interest from which such production payment was created.

"(c) Removal Price.—For purposes of this chapter—,

"(1) In general.—Except as otherwise provided in this subsection, the term 'removal price' means the amount for which the barrel is sold.

"(2) Sales between related persons.—In the case of a sale between related persons (within the meaning of section 103(b)(6)(C)),

// 26 USC 103. // The removal price shall not be less than the constructive sales price for purposes of determining gross income from the property under section 613.

// 26 USC 613. //

"(3) Oil removed from premises before sale.—If crude oil is removed from the premises before it is sold, the removal price shall be the constructive sales price for purposes of determining gross income from the property under section 613.

"(4) Refining begun on premises.—If the manufacture or conversion of crude oil into refined products begins before such oil is removed from the premises—,

"(A) such oil shall be treated as removed on the day such manufacture or conversion begins, and

"(B) the removal price shall be the constructive sales price for purposes of determining gross income from the property under section 613.


The Crude Oil Windfall Profit Tax Act, was signed into law in 1980 in response to sharp oil price increases during the 1970s, as an attempt to contain oil industry profits resulting from a temporary but significant increase in global oil prices. The tax ceased to be economical and was abolished in 1988 after oil prices fell. There is continuing debate among economists about the utility of taxes on windfall profits. Some argue that windfall profits are an important part of a free market economy, because they indicate shortages to which the market will respond with increased production and, eventually, lower prices. The possibility of a similar windfall profit tax was raised when oil prices rose sharply in 2005 as the result of political instability in the Middle East and a series of hurricanes that limited United States domestic oil production from the Gulf of Mexico.



Deffeyes, Kenneth F. Hubbert's Peak: The Impending World Oil Shortage. Princeton, N.J.: Princeton University Press, 2003.

Web sites

Thorndike, Joseph J. "Historical Perspective: The Windfall Profit Tax—Career of a Concept." Tax History Project, November 10, 2005. 〈〉 (accessed March 5, 2006).

"World Oil Market and Oil Price Chronologies: 1970–2004." Department of Energy, March 2005. 〈〉 (accessed March 5, 2006).