A taxing approach to high energy costs will backfire

Opinion The views expressed by contributors are their own and not the view of The Hill A taxing approach to high energy costs will backfire Comments: by Alex Muresianu, opinion contributor - 07/10/26 9:30 AM ET Comments: Link copied by Alex Muresianu, opinion contributor - 07/10/26 9:30 AM ET Comments: Link copied Title: US Energy Crisis Image ID: 26177439419684 Article: Gas prices are seen at a gas station in Park Ridge, Ill., Thursday, June 25, 2026. (AP Photo/Nam Y. Huh)

Title: US Energy Crisis Image ID: 26177439419684 Article: Gas prices are seen at a gas station in Park Ridge, Ill., Thursday, June 25, 2026. (AP Photo/Nam Y. Huh)

Gas prices are seen at a gas station in Park Ridge, Ill., Thursday, June 25, 2026. (AP Photo/Nam Y. Huh)

People are frustrated with soaring energy prices, and Congress has taken notice. Sadly, the response so far has been to recycle old policy ideas that seek to punish producers, hoping they will spur energy bills to take a turn for the better.

Two policies in particular are worth examining.

Sen. Sheldon Whitehouse (D-R.I.) and Rep. Ro Khanna (D-Calif.) introduced the Big Oil Windfall Profits Tax Act, which would permanently tax sales of crude oil at 50 percent of the gap between the current quarter’s average price and the 2025 average. Meanwhile, Sen. Chuck Schumer (D-N.Y.) and Sen. Ron Wyden (D-Ore.) have introduced a bill called the Taxing Buybacks from Big Oil Windfalls Act, raising the stock buyback tax from 1 percent to 25 percent for oil and gas companies.

While these ideas might have some visceral appeal, taxing producers is the opposite of a solution to a supply crisis.

While neither proposal taxes profits directly, each references Big Oil “windfalls.” The underlying justification is that when oil companies are earning disproportionately high profits, they should pay higher taxes. But the U.S. already has a tax that does that: the corporate income tax. In years where high oil prices mean higher profits — as is the case in 2026 — oil companies already bear more tax than usual.

Specific taxes targeting supposed windfall profits also have a track record, and the report card is anything but passable. Just four years ago, several countries across Europe gave these taxes a go. The revenue raised was minimal, but the investment lost was tangible. Spain’s windfall profits tax harmed clean energy investments as much as it did fossil fuels; the United Kingdom’s North Sea oil production has further declined.

The mechanics of the excise-based approach and the stock buyback-based approach differ, but they produce similar results. By taxing the differential between a base price and the sale price, the excise-based approach would reduce the upside of oil and gas investment. The buyback tax, meanwhile, would more directly raise the cost of capital by lowering after-tax returns for investors.

Each would result in tax penalties for energy investment. Proponents of these taxes might argue that they are just temporary, or in some way limited to profits earned under extreme circumstances. The Whitehouse excise tax is levied only when the price of oil is above a certain threshold, and the stock buyback tax increase would cease when the retail price falls below $2.937 for five consecutive weeks.

This defense has two problems. For one, they are not temporary. If prices end up stabilizing above the baseline levels suggested in either the crude oil excise-based proposal or the oil and gas buybacks tax-based proposal, then the taxes will be permanent penalties for oil and gas investment.

But, more importantly, even temporary or conditional taxes shape expectations. Investors only risk capital in highly volatile industries like oil and gas production because they see the upside of high-price scenarios offsetting the downside of low-price scenarios. For every Strait of Hormuz crisis curbing supply and driving oil prices up, there is a COVID pandemic reducing demand and driving oil prices down — even to below zero, if you recall.

Drillers looking to expand must weigh the potential of each scenario. High profits under negative supply shocks, high losses under negative demand shocks. But if they have to assume a high likelihood that the government will enact punitive, confiscatory taxes on them during the high-profit years — even if those taxes are not currently active — then the investment may no longer be worth it.

If you want more energy production, taxing producers is the wrong place to start. And if you want to tax companies more if they’re making big profits, the corporate income tax already does that. If oil companies make high profits one year, their corporate income tax liability will rise proportionately. There is no need for a standalone solution.

Factors contributing to energy bills and gas prices today are myriad, but the policy response need not be complicated. The focus should be on a stable tax code that aids, not detracts, from furthering energy production.

Alex Muresianu is a senior policy analyst at the Tax Foundation.