The Crude Oil Windfall Profit Tax Act ( P.L. 96-223 ) was enacted in 1980 as part of acompromise between the Carter Administration and the Congress over the decontrol of crude oilprices. The structure of the WPT was based on the structure of the oil price control program. From August 1971 to January 1981 the price of domestic oil was controlled by the federalgovernment -- it was constrained from rising to market levels. Oil price controls were initiated underPresident Nixon's general wage-price freeze of August 15, 1971, which consisted of four stages ortime periods called phases, each with various degrees of controls. (1) These controls were notfocused on oil alone -- they applied generally to most goods and services. The general wage-pricefreeze terminated in 1973, but under phase IV of the program -- effective from August 12, 1973 toApril 30, 1974 -- price controls on petroleum were retained. Oil price controls were extended through 1975 under the Emergency Petroleum AllocationAct of 1973 ( P.L. 93-159 ) -- enacted in November 1973, at the onset of the Arab oil embargo. (2) This law created the two-tieredprice control program, making the structure more complex. Most domestically produced oil wascategorized as either "lower tier (old) oil" or "upper tier (new) oil," each with its correspondingcontrolled base price. Lower tier oil was generally oil from properties that began production before1973. Under regulations, the price ceiling on this oil was the highest posted price in effect on May15, 1973 plus $0.35/barrel on all oil produced from wells that produced at less than their 1972 levels,which resulted in a posted price for old oil of about $4.25/barrel. Subsequent regulations increasedthe ceiling price in 1973 to $5.25/barrel. New oil (oil produced from wells that began productionin1973), stripper oil (oil produced from wells that produce 10 bpd or less), and imported oil werenot price controlled -- it could be sold at the market clearing price, which was determined by thedelivered prices of imported crude inclusive of the customs duties. Note that these tiers wereartificial designations for the purposes of controlled pricing; the distinctions were made only forpurposes of establishing different base prices; they had no other meaning. Oil price controls were amended under the Energy Policy and Conservation Act of 1975(EPCA75), and the Energy Conservation Act of 1976 (ECA). EPCA75 ( P.L. 94-163 ) replaced thetwo-tiered price control system with a three-tier system. Lower tier oil was oil produced below the"base production control level," -- the level below the 1975 average monthly production; upper tieroil was output in excess of this base level or output from new wells -- those brought into productionafter 1975. Stripper oil was initially classified as (controlled) upper tier oil, but subsequent changes(see below) decontrolled it altogether. EPCA75 also established a national average price for all oilof $7.66/barrel, the weighted average price of lower tier oil (old oil), which had a ceiling of$5.25/barrel and upper tier oil (new oil and stripper oil), which, by this time also became controlledat $11.28/barrel. The average domestic oil price was permitted to increase at the rate of 10%annually. (In 1975, uncontrolled imported oil sold for about $13.25/barrel. At the onset of the oilprice control program, domestic oil prices were just above $3 per barrel.) EPCA75 also gave thePresident the discretionary authority to end oil price controls anytime between May 31, 1979 andSeptember 30, 1981 -- on October 1,1981 all controls would expire. The ECA of 1976 made further(mostly technical) amendments to the price control system -- e.g., exempting stripper oil from theprice controls -- but otherwise it left the basic structure of the oil price control program intact. Thus,in 1979, on the eve of the WPT, the oil price control program categorized all domestic oil productioninto these tiers, each with its own corresponding controlled or market price. Table 1 summarizesthis structure, which was the foundation for the 1980 WPT. EPCA75 also gave the President discretionary authority to gradually phase out oil pricecontrols over the 28 month period between June 1, 1979, and September 30, 1981, after which priceswould rise to world market levels. On April 5, 1979, the Carter Administration announced itsintention to use that authority, and throughout its remaining term in office price controls onpetroleum products and various types of crude were selectively decontrolled. The intent of thegradual decontrol was to promote energy conservation and to stimulate energy exploration andproduction without the dislocations that might result with sudden decontrol. Between April 1979and January 1981, oil prices were partially and gradually decontrolled -- newly discovered oil wascompletely decontrolled, but price controls on other types of oil continued. President Reaganrepealed price controls on January 28, 1981, which was one of his first official decisions asPresident. (3) Excess profits taxes are extraordinary measures as tax policy instruments, their use limitedto wartime or other periods characterized by economic emergencies and instabilities such asinflations and hyper-inflations. Such was the case with the surtax on business profits imposed as atemporary measure to control large profits earned during World Wars I and II, and the KoreanWar. (4) The origin of the 1980 WPT was, as with many other energy taxes and energy tax subsidies,the first oil crisis of the 1970s -- the Arab Oil Embargo of 1973-74. Between 1973 and 1980,attempts to decontrol oil prices were accompanied by proposals to impose an excess profits tax. In1974, the Ford Administration proposed an "emergency windfall profit tax" to recapture oil industrywindfalls resulting from price decontrol. In August of 1975, the Senate Finance Committeeapproved a windfall profit tax conditioned on price decontrol. Congress, however, did not decontroloil prices. In 1977, the Carter Administration proposed an oil tax similar to the 1980 windfall profittax -- the crude oil equalization tax -- as part of a program to restructure the existing pricecontrols. (5) Theseproposals were the precursors of the 1980 windfall profit tax. Table 1. Summary of the Oil Price Control Program in 1979 Source: U.S. Congressional Budget Office, The Decontrol of Oil Prices: An Overview , BackgroundPaper, May 1979, pp. 5-7. a. Price for uncontrolled oil is at the refinery gate, which is basically the import price plustransportation costs. The windfall profit tax that was ultimately enacted in 1980 originated with President Carter'sApril 5, 1979 decision to gradually phase out price controls between June 1, 1979, and September30, 1981, as discussed above. At the same time, the Carter Administration announced its proposalto impose a WPT "to prevent unearned excessive profits" by the oil industry. In Congress, the CarterAdministration's original windfall profit tax bill, H.R. 3919, was proposed by Representative AlUllman, Chairman of the Ways and Means Committee. The House approved an amended versionon June 28, 1979. The Senate approved its version at the end on 1979, and the House-SenateConference deliberated for about three months. President Carter signed the bill into law on April2, 1980. The WPT was amended many times after it was enacted in 1980. Virtually every tax law thatwas enacted between 1980 and 1988 made some type of amendment to it, usually minor andtechnical, but sometimes, significant. For example, the Technical Corrections Act of 1982 ( P.L.97-448 ) made several minor and technical amendments. Major changes were made, however, underthe Economic Recovery Act of 1981 ( P.L. 97-34 ), which reduced tax rates on newly discovered oil,made stripper oil (from small wells) tax exempt, and introduced a tax credit for royalty owners. Soon after enactment of the WPT there were proposals to reduce tax rates, liberalize someof the provisions. Proposals to repeal the WPT altogether were also common throughout theeight-year life of the tax. Repeal was part of President Reagan's platform in the 1980 presidentialcampaign and repeal proposals were embodied in the Administration's FY1988 and FY1989budgets. (6) WPT repealwas part of the Treasury Department's tax reform proposal of 1984 as part of a compromise thatwould have repealed the oil industry's two major tax incentives (subsidies): the percentage depletionallowance and expensing of intangible drilling costs. In the spring of 1986, there was speculationthat a WPT repeal proposal would be part of the tax reform bills of 1986. The eventual law -- theTax Reform Act of 1986 ( P.L. 99-514 ) -- did not, however, repeal the WPT. Another major repeal attempt was made through an amendment to the 1986 debt limit bill(H.J.Res. 668) which would have increased the debt ceiling to over $2.3 trillion through FY1987. This amendment was approved by the House and Senate, but it was deleted in conference. SomeMembers of Congress also favored repeal; congressional support for repeal probably reached a peakin 1987 and 1988. In May 1987, for example, ten bills were pending in the Congress proposing torepeal the WPT. The actual repeal of the WPT in 1988 was made through an amendment to omnibus tradelegislation (H.R. 3). After hearings in the summer of 1987, the Senate voted 58-40 in favorof a repeal amendment to the trade bill. The original House trade bill, however, did not contain theamendment.