# Windfall Tax: Definition, Purposes, and Examples

![Windfall Tax: A surtax imposed by governments on businesses or economic sectors that have benefited from economic expansion.](https://www.investopedia.com/thmb/QZMgGTPXccdE2necdpRhZ0WvNRw=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/windfalltax.asp-final-b8f39a3b65af4ff7bb3a40e6af2b70db.png)

*— Investopedia / Zoe Hansen*

> **Definition**
>
> A windfall tax is a surtax levied by governments on industries and commodity-based businesses, like the oil and gas sector, that have benefited from economic expansion. The main goal of a windfall tax is to redistribute excess profits for the public good, although its use and distribution are hotly debated. In the U.S., several windfall taxes have been proposed, none have recently been made into law.

## What Is a Windfall Tax?

A windfall tax is a tax levied by governments against certain industries when economic conditions allow those industries to experience significantly above-average profits. Windfall taxes are primarily levied on companies in the targeted industry that have benefited the most from the economic windfall, most often commodity-based businesses.

### Key Takeaways

*   Governments levy windfall taxes on industries like oil and gas during times of exceptional profit, often due to external factors such as geopolitical events or market shifts. This ensures that high profits benefiting from such factors contribute to the broader public good.  
    
*   While windfall taxes aim to redistribute profits for societal benefits, they often lead to debates about their impact on investment and innovation, as companies argue that the taxes create economic uncertainty and deter risk-taking.  
    
*   Historical examples, such as the 1980 Crude Oil Windfall Profit Tax in the U.S., demonstrate that the actual revenue generated from windfall taxes can fall short of projections. This highlights the challenges in accurately forecasting their economic impact.  
    
*   Windfall taxes can also be applied to individuals receiving large, unexpected sums of money, such as through lotteries or inheritances, which are taxed similarly to regular income, ensuring equitable tax contribution from sudden financial gains.  
    
*   Modern legislative proposals, like the proposed Ending Corporate Greed Act in the U.S., reflect ongoing considerations of using windfall taxes to address issues of corporate profiteering and economic inequality, particularly in response to inflationary pressures.

## Exploring the Mechanics of Windfall Taxes

Windfall taxes are specialized levies imposed on entities that experience sudden and substantial financial gains, often referred to as "windfalls." These unexpected profits can result from various factors, such as significant changes in market conditions, the discovery of natural resources, or shifts in government policy.

The primary objective of windfall taxes is to appropriate a portion of these extraordinary profits, which are perceived to exceed normal returns, for the public good. Governments assert that these profits are not solely due to the taxed entity's efforts but also due to external factors, justifying the redistribution of such gains to benefit society as a whole.

Despite their potential to generate significant government revenue, windfall taxes are often a subject of debate. Advocates argue that they promote equitable wealth distribution and can finance critical public services or infrastructure projects. Opponents argue that windfall taxes can deter investment by creating uncertainty and diminishing incentives for companies to undertake risk. We'll talk more about the downsides to windfall taxes later in this article.

## Impact of Windfall Taxes on the Oil and Gas Sector

Oil and gas companies are common targets of windfall taxes. The oil and natural gas industry's net income soared, nearly doubling to an estimated $2 trillion from 2021 to 2022, triggering talks on windfall taxes. According to Deloitte, the global upstream industry is projected to maintain its 2023 hydrocarbon investment level with a projected increase of 11% year over year.

On September 30, 2022, the [EU](https://www.investopedia.com/terms/e/europeanunion.asp) Council decided to levy a "temporary solidarity contribution" on firms in sectors like crude oil, natural gas, coal, and refineries, targeting profits exceeding a 20% increase over their 2018 average. This is on top of whatever taxes they already owe in their countries. In each member state, proceeds help households and companies and ease the effects of high electricity prices.

In October 2022, President Biden threatened to seek a windfall profits tax on oil and gas companies, which have reported very high profits and continue to charge high prices. He told them to use their "outrageous" bonanza—the effect of the Ukraine war—to expand oil supplies or reduce consumer prices.

In February 2023, the Big Oil Windfall Profits Tax Act was introduced. The legislation proposes a quarterly tax on large oil companies equal to 50% of the difference between the current price per barrel and the pre-pandemic average price per barrel between 2015 and 2019. The tax will apply to companies that produce or import at least 300,000 barrels of oil per day. Smaller companies, accounting for about 70% of domestic production, will be exempt from this tax.  

> **Fast Fact**
>
> As of July 2024, the Big Oil Windfall Profits Tax Act was still being discussed.

## Pros and Cons: The Ongoing Windfall Tax Debate

Like most tax measures, windfall taxes have both supporters and critics. The benefits of a windfall tax include proceeds being directly used by governments to bolster funding for social programs. Those against windfall taxes claim that they reduce companies' initiatives to seek out profits. They also believe that profits should be reinvested by companies to promote innovation that will, in turn, benefit society as a whole.

Then there is the question of whether windfall taxes actually raise the amounts that are predicted. Consider the example in the U.S., the Crude Oil Windfall Profit Tax of 1980, imposed by Congress during President Jimmy Carter's administration.

A 2006 Congressional Research Service report showed the windfall profits tax brought in $80 billion from 1980 to 1988—far less than the $393 billion expected. Due to the deductibility of the WPT against the income tax, cumulative net WPT revenues were about $38 billion, significantly less than the $175 billion projected." In a more current example, _Bloomberg_ reports that the windfall tax in Italy had "(as of September \[2022\]) yielded only about one-fifth the income the government had hoped for." On the other hand, the taxes do yield revenue that would not otherwise be available to offset the societal costs of high prices.

Critics point to other possible negative consequences. While windfall profits are taxed to encourage the taxed entities to lower their prices for the benefit of consumers, the tax could end up reducing investment because the new tax could make the after-tax profit not worth the effort. This happened with the 1980 tax, according to the Congressional Research Service report. It notes that, from "1980 to 1988, the WPT may have reduced domestic oil production anywhere from 1.2% to 8.0% (320 to 1,269 million barrels). Dependence on imported oil grew from between 3% and 13%." The tax was repealed in 1988.

## Examining the Criticisms of Windfall Taxes 

Let's look more specifically at some general downsides to windfall taxes; detractors may cite any of the following for reasons not to adopt windfall taxes:

*   **Discourages Investment and Innovation:** One criticism of windfall taxes is that they can discourage investment and innovation. Businesses argue that imposing additional taxes on extraordinary profits reduces the funds available for reinvestment in the company. For instance, tech companies like Google and Amazon often reinvest a significant portion of their profits into [research and development](https://www.investopedia.com/terms/r/randd.asp) to drive technological advancements. Such taxes might redirect funds away from R&D, slowing innovation.
*   **Creates Economic Uncertainty:** Another major criticism is that windfall taxes create economic uncertainty. Businesses thrive on stability and predictability in tax policies to make informed long-term investment decisions. Windfall taxes can create uncertainty. Companies may hesitate to expand or invest in new projects if they are unsure whether future profits will be subject to sudden additional taxation (even though those profits themselves may be a bit uncertain).
*   **Passes Costs to Consumers:** Businesses can contend that the burden of windfall taxes will ultimately be passed on to consumers. Companies may respond to the additional tax burden by raising prices for their products or services to maintain their profit margins. Alternatively, companies may have less cash to award to shareholders in the form of dividends.
*   **Limited Long-Term Effectiveness:** Economists could argue that windfall taxes may have limited long-term effectiveness in addressing economic inequalities or generating sustainable revenue. These taxes are typically reactive and temporary, targeting profits that are considered exceptional. For instance, instead of taxing an ongoing, sustainable revenue source, the government receives a one-time funding source that will need to be replaced at some point in the future.

## Recent Developments: Windfall Tax in Action 

On June 21, 2024, Senator [Bernie Sanders](https://www.investopedia.com/articles/investing/110915/review-bernie-sanders-economic-policies.asp) announced his intention to introduce the Ending Corporate Greed Act, aimed at tackling the issue of corporate greed and excessive profits. This legislation proposes a 95 percent windfall tax on large corporations that are exploiting inflation to justify high prices on essential goods and services.

The bill, supported by Senator Ed Markey and Representative Jamaal Bowman, builds on historical precedents, including windfall taxes imposed during World War II and the Korean War, as well as a 1980s tax on oil and gas companies discussed earlier in this article. Sanders argues that with corporate profits hitting unprecedented levels and price gouging becoming rampant, it is crucial to rein in corporate greed. He and Bowman emphasize that rising corporate profits have exacerbated inflation and negatively impacted workers' purchasing power.

The Ending Corporate Greed Act proposes maintaining the current 21% corporate tax rate on profits up to pre-pandemic levels while introducing a 95% tax on profits exceeding the average from 2015-2019, adjusted for inflation. The tax would apply only to large companies with annual revenues exceeding $500 million and be limited to 75% of income in the current year. It is designed as a temporary measure for 2024, 2025, and 2026, aiming to curb excessive profiteering without penalizing companies that raise prices due to legitimate cost increases.

## Personal Windfall Taxes: What Individuals Need to Know 

Windfall taxes may also apply to individuals who gain sudden riches from receiving a significant sum of money through a [gift](https://www.investopedia.com/terms/g/gift.asp), [inheritance](https://www.investopedia.com/terms/i/inheritance.asp), or through game-show, [gambling](https://www.investopedia.com/terms/g/gamblingincome.asp) or [lottery winnings](https://www.investopedia.com/terms/l/lottery.asp). In many cases, inheritances, gifts from family members or friends, and life insurance payouts are tax-free to the recipient.

However, federal, state, or local taxes may be owed by the giver or by the estate from which the inheritance is received. Any wealth gained from playing the lottery or gambling is considered [taxable income](https://www.investopedia.com/terms/t/taxableincome.asp). These winnings are fully taxable and must be reported to the Internal Revenue Service (IRS) by filing the individual tax return.

An individual who is awarded a sizeable monetary settlement after winning a lawsuit is likely to owe federal tax on the amount received. While certain settlements, such as damages for personal physical injuries or physical sickness, are considered non-taxable by the IRS, most other types of damages are taxed as ordinary income.  

## Comparing Windfall Taxes to Standard Taxation

Let's wrap up the article by comparing windfall taxes to normal, recurring taxes. Windfall taxes and regular taxes differ primarily in their objectives, scope, and application. Regular taxes are designed to provide a consistent and predictable source of revenue for governments, an obvious deviation from how windfall taxes work.

The application of windfall taxes is usually narrower and more selective compared to regular taxes. While regular taxes affect a broad base of taxpayers, windfall taxes are aimed at a specific group that has benefited disproportionately and perhaps unfairly. This targeted approach can lead to debates about fairness, as normal taxes can potentially be seen as less discriminatory (though there are exceptions to this). Businesses subject to windfall taxes may argue that such measures penalize their success, whereas regular tax may be imposed on everyone, granted at [different rates](https://www.investopedia.com/terms/t/taxrate.asp).

Another major difference is how these taxes are implemented and enforced. Regular taxes are integrated into the ongoing tax system, with established mechanisms for collection and compliance. Windfall taxes, being more sporadic, may require more efforts to define the scope of "excess" profits, set appropriate tax rates, and ensure compliance. This can create legal and logistical challenges, as companies may dispute the calculations and criteria used to assess their tax liability since the profit may have come about in a very unique way.

## What Are Windfall Taxes?

Windfall taxes are special taxes levied by governments on companies or individuals that have unexpectedly gained substantial profits due to unforeseen circumstances. These taxes are often imposed on sectors like oil, gas, or natural resources when market conditions lead to exceptionally high revenues.

## Who Has to Pay a Windfall Tax?

Companies and industrial sectors that can be subject to windfall taxes are those with massive increases in profits, generally due to situations such as wartime, commodities shortages, and other situations and events that drive up prices. Individuals may also be taxed on windfalls, such as those from inheritances or lottery winnings.

## Who Benefits From Revenue Raised by Windfall Taxes?

Taxes are imposed by governments and can be used for a variety of purposes. During World War I and World War II, windfall profit tax revenue went to support the war effort. The 1980 taxes added to general government funds. Revenue from the new EU Council 2022 tax is to be used to "provide financial support to households and companies and to mitigate the effects of high retail electricity prices."

## How Do Windfall Taxes Impact the Economy?

Windfall taxes can have both positive and negative impacts on the economy. Positively, they can provide governments with additional revenue for public services and social programs, potentially reducing inequality. Negatively, they may discourage investment and innovation in the affected industries, as companies might be less willing to invest if they believe their profits will be heavily taxed.

## The Bottom Line

Windfall taxes will always be a contentious issue debated between the shareholders of profitable companies and the rest of society. Windfall taxes can be imposed on companies in certain segments of the economy, such as oil and gas, that benefit from situations such as commodity shortages that greatly increase the prices of their products at the expense of consumers. Individuals may also owe tax on a windfall, depending on its source and the tax laws of the federal government or their state or locality.

> **Article Sources**
>
> 1.  International Energy Agency. "[World Energy Outlook 2022: Executive Summary](https://iea.blob.core.windows.net/assets/fe7c251b-8651-4d3a-8362-0ffe3e50d37b/Executivesummary_WorldEnergyOutlook2022.pdf)." Page 3.
>     
> 2.  Deloitte. "[2024 Oil and Gas Industry Outlook](https://www2.deloitte.com/us/en/insights/industry/oil-and-gas/oil-and-gas-industry-outlook.html)."
>     
> 3.  European Council. "[Council Agrees on Emergency Measures to Reduce Energy Prices](https://www.consilium.europa.eu/en/press/press-releases/2022/09/30/council-agrees-on-emergency-measures-to-reduce-energy-prices/)."
>     
> 4.  The New York Times. "[Biden Accuses Oil Companies of ‘War Profiteering’ and Threatens Windfall Tax](https://www.nytimes.com/2022/10/31/us/politics/biden-oil-windfall-tax.html)."
>     
> 5.  U.S. Congress. "[S.408 - Big Oil Windfall Profits Tax Act: Summary](https://www.congress.gov/bill/118th-congress/senate-bill/408)."
>     
> 6.  Congressional Research Service. "[Crude Oil Windfall Profits Taxes: Background and Policy Considerations](https://crsreports.congress.gov/product/pdf/if/if12064)." Page 2.
>     
> 7.  U.S. Congress. "[S.408 - Big Oil Windfall Profits Tax Act: Actions](https://www.congress.gov/bill/118th-congress/senate-bill/408/all-actions)."
>     
> 8.  Congressional Research Service. "[The Crude Oil Windfall Profit Tax of the 1980s: Implications for Current Energy Policy](https://web.archive.org/web/20120211074013/http://assets.opencrs.com/rpts/RL33305_20060309.pdf)." Summary Page.
>     
> 9.  Bloomberg. "[Windfall Taxes Are All the Rage. They Shouldn't Be](https://www.bloomberg.com/opinion/articles/2022-11-02/easing-energy-price-pain-with-windfall-taxes-carries-risk)."
>     
> 10.  Bernie Sanders Senate. "[NEWS: Sanders, Bowman, Markey Introduce Legislation to Combat Corporate Greed and Windfall Profits](https://www.sanders.senate.gov/press-releases/news-sanders-bowman-markey-introduce-legislation-to-combat-corporate-greed-and-windfall-profits/)."
>      
> 11.  Internal Revenue Service. "[Publication 525, Taxable and Nontaxable Income](https://www.irs.gov/pub/irs-pdf/p525.pdf)." Page 34.
>      
> 12.  Internal Revenue Service. "[Publication 525, Taxable and Nontaxable Income](https://www.irs.gov/pub/irs-pdf/p525.pdf)." Pages 33- 34.