Definition
The term windfall profits tax refers to a tax levied against a company or industry when they experience extraordinary profits. While rare, windfall taxes are oftentimes collected when economic conditions allow companies that sell commodities to realize above-average profits.
Explanation
Also referred to as a windfall tax, governments sometimes institute a windfall profit tax when environmental conditions allow companies or industries to benefit in an unusual manner. Windfall taxes will often take the form of an ad valorem excise tax, meaning it will be collected directly from the producer and is based on the value of the item sold. The proceeds from the tax are normally used to fund social programs.
In 1980, the Crude Oil Windfall Profit Tax Act was enacted in the United States. The purpose of this tax was to recover the unusually high profits oil producers were making as a result of the OPEC oil embargo, which created a unique opportunity for the redistribution of wealth from consumers to producers. This tax was also projected to help close an ever-increasing federal budget deficit.
The tax was eventually repealed during the Reagan Administration. The tax had failed to live up to its revenue generating projections; and Legislators were also concerned about America's growing dependence on oil imports. The tax only applied to domestically produced oil and was resulting in operating losses for producers in the United States.
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