ICYMI: Scarinci: High gas prices as war profiteers
Russia’s invasion of Ukraine has dramatically increased volatility in the global oil market, with US gas prices soaring. At the same time, the world’s largest oil companies are generating record profits.
Skyrocketing energy costs have sparked criticism over whether oil companies are doing enough to help lower prices for consumers. Some critics, including White House officials, have even speculated that the companies may be guilty of profiteering – taking advantage of the Ukraine crisis to make excessive profits.
Long history of wartime profiteering
While profit can occur in times of peace, it is much more common in times of crisis. For every person willing to sacrifice for the good of the country, there is another who is willing to exploit the opportunities that come with war. In the early days of our country, Boston merchants faced angry mobs who accused them of hoarding valuable goods like coffee and sugar in order to drive up prices. More recently, military contractors have come under fire for signing lucrative contracts.
During the Civil War, the North and the South were plagued by profiteers. The problem was more difficult in the Confederate States where essential goods were in short supply, resulting in one of the nation’s first laws aimed at limiting excess profits. In 1863, the Confederacy enacted a law imposing a special income tax of 10% on profits from the sale of war material; a year later, a special tax of 25% was levied on all profits above 25%.
While the North had better access to funds and supplies, businesses still sought to leverage the war to make large profits. In a scandal, a contract to build five forts totaled $191,000, including $111,000 in profit. In another scandal, ships were bought for double their value only to be sunk later at sea due to their shoddy construction.
During World War I and World War II, profit was again a major concern. In 1915, Du Pont, which made smokeless gunpowder, doubled its price and saw its annual profits rise from $5 million to $82 million. In response, Congress enacted laws to ensure corporations could not profit unfairly from the war. Some laws established price controls, while others imposed taxes on excess profits. As President Woodrow Wilson said in 1918, “The profit which cannot be obtained by the restraints of conscience and love of country can be obtained by taxation.”
During World War II, the tax rate imposed on so-called windfall profits reached 95%. However, companies still managed to find ways to increase their profits, with corporate profits increasing by 41-77% during the war.
Modern measures to deal with record profits of big oil companies
As the war between Ukraine and Russia tightens the world’s energy supply, the oil and gas industry is under intense scrutiny. At the end of April, Exxon Mobil reported $5.48 billion in profits during the first quarter of 2022, more than double the profits recorded during the same period last year. Similarly, Shell’s adjusted profit reached $9.1 billion, nearly triple the $3.2 billion generated in the same period last year. At the same time, gas prices have reached levels not seen since the 1970s. As of June 23, 2022, the national average is hovering around $5/gallon, according to AAA.
Democratic lawmakers proposed a similar solution to the excess profit taxes imposed during World War I and World War II. The Big Oil Windfall Profits Tax Act, introduced in March, would amend the 1986 Internal Revenue Code to impose a tax per barrel equal to 50% of the difference between the current price of a barrel of oil and the pre-pandemic average price per barrel between 2015 and 2019.” According to a summary released by Rep. Ro Khanna (D-CA), “Revenues generated from windfall profits of major oil companies will be returned to consumers in the form of a quarterly refund, which would be phased out for single filers who earn more than $75,000 in annual income and joint filers who earn more than $150,000.
While the prospects for passing the legislation are uncertain, the UK imposed a similar windfall tax in May. The EU is also considering measures to capture windfall profits generated by rising energy prices through taxation.
Donald Scarinci is well known to our readers. He is the founding partner of Scarinci Hollenbeck, one of NJ’s largest law firms, attorney and advisor to many NJ elected officials, trustee of the NJ Institute of Local Government Attorneys, editor of the popular Constitutional Law Reporter. https://constitutionallawreporter.com/ and author of four books.