Tax Big Oil?

Leonardo Jia

March 25, 2022

Gas prices are up, and you’ve probably heard that on the news. On March 8 of this year, gas prices were the highest they’ve been since 2008. There have been many points of blame, including the Russian invasion of Ukraine, and Biden shutting down the Keystone Pipeline. What’s the solution? Senator Elizabeth Warren (D-MA) proposes raising the gas tax on oil companies to solve this issue.

In a recent proposal, Warren and fellow senator Sheldon Whitehouse (D-RI), along with representative Ro Khanna (D-CA) have brought up the Big Oil Windfall Profits Tax Act. The act “would levy a per-barrel-tax on big oil companies' pandemic profiteering prices and return the revenue to consumers as a quarterly rebate” according to a press release on Warren’s website. The overall idea is redistributing money from large oil companies back to consumers.

What Warren and her colleagues have failed to understand, however, is basic economics. In economics, price elasticity is defined as how the quantity demanded for a good changes as price changes. If the price of an elastic good rises, the quantity demanded will fall more than for an inelastic good. When the government taxes a company producing a certain good, the burden of that tax is determined by the elasticity of the good they produce. The more price inelastic a good is, the higher the burden of the tax on consumers. This is because a tax would cause companies to raise prices, and if a good is inelastic, the quantity demanded would remain relatively unchanged. This applies to gas, which the US Energy Administration reports has a price elasticity of -0.02 to -0.04 in the short term, making it relatively price inelastic.

This begs the question: what would the government do with the tax revenue? Warren’s proposal would give it back to consumers in the form of a quarterly rebate. However, there are two main problems with this plan. First and foremost, the bill itself says the tax revenue would also be used “for other purposes”, meaning that consumers wouldn’t receive all of the money collected. Second, this proposal would still devastate consumers, especially those with lower incomes in the short term because gas prices would rise before they receive their rebate, taking out more money from their pockets. All in all, the Big Oil Windfall Profits Tax Act is a terrible proposal that needs serious rethinking.