A windfall tax is a higher tax rate on profits that ensue from a sudden windfall gain to a particular company or industry.
There have been windfall taxes in various countries across the world, including Australia,[1] Italy,[2][3][nb 1] and Mongolia (2006-2009).[5][6] Following the 2021–2023 global energy crisis, policy specialists at the International Monetary Fund recommended that governments institute permanent windfall profits taxes targeted at economic rents in the energy sector, excluding renewable energy to prevent hindering its further development.[7]
Thomas Baunsgaard and Nate Verson of the IMF recommend implementing permanent windfall profit taxes on fossil fuel extraction but not temporary taxes or taxes on renewable energy.[7] The taxes should always target a clear measure of excess profits and not be tied to price levels or revenue.[7] They also recommend ensuring that markets can add new capacity quickly if-needed to avoid a spike in prices.[7] Another 2022 IMF paper argues these taxes are a tool for efficiently taxing economic rents, which are often a result of monopolistic power or unexpected events like pandemics, war, or natural disasters, and contribute to windfall profits. Such profits have raised public and policy concerns about price gouging, where firms are perceived to be profiting excessively from unforeseen circumstances.[8]
Eric Levitz argues that these taxes are worth pursuing as it would incentivize producers to invest in lowering prices during times of supply shocks by expanding production instead of giving out dividends to shareholders.[9]
In 2022, Joseph Stiglitz argued for windfall profit taxes for oil and gas in Australia to disincentivize raising prices.[10]
A 2008 Wall Street Journal[11] editorial argued that income taxes incentivize companies to make more profits which results in more tax revenue. A 2022 Reason article argued against windfall taxes.[12]
Queensland, Australia has a windfall profits tax on energy sources like coal.[13]
Polling by the Australia Institute as well as Oxfam showed more than two-thirds of Australians supported windfall profit taxes.[14]
For fiscal years 2022 and 2023, The EU asked energy companies to return 33% of taxable surplus profits to governments to help fund energy affordability and address shortages.[14]
Rapid drop of photovoltaic equipment in the period 2011 to 2013 has created windfall profits conditions due to lagging response of regulators by adjustment of feed-in tariffs. Regulators in Spain, Greece, Bulgaria and Romania have introduced retroactive incentive reductions.[15] In the Czech Republic a windfall tax has been introduced on solar electricity and further clampdown of solar power companies was considered in 2014.[16]
The temporary windfall tax in the Czech Republic will apply from 1 January 2023 for a period of 3 years (i.e. 2023-2025) for exceptionally profitable companies in the energy trading and production, banking, petroleum, and fossil fuel extraction and processing sectors. It will operate as a 60% tax surcharge applied to the excess profits of these companies determined as the difference between the tax base in 2023-2025 and the average of the tax bases for the last 4 years (i.e. 2018-2021) plus 20%. Czech Ministry of Finance (MF) expects the extraordinary tax to bring in approximately CZK 85 billion to the state budget in 2023, with another CZK 15 billion to be brought in next year by the EU price caps for electricity producers.[17][non-primary source needed]
The proposed windfall tax is the government's response to the current need to raise temporary additional revenue for the state budget to pay for extraordinary expenditures related mainly to compensating high energy prices for citizens and companies.
In November 2022, Greece responded to soaring energy prices by imposing a 90% excess profits tax on energy companies. The Greek energy minister justified this decision by stating, "Our primary concern is to maintain affordable prices on consumer bills until the end of this major, pan-European energy crisis."[18] The tax revenues were used to subsidize energy prices.
In 2023, Italian government announced a new windfall profits tax on banks, targeting their excess profits with a 40% tax rate. This move led to a €9.2 billion drop in market value for the affected firms, significantly more than the tax's expected revenue of up to €3 billion.[19][better source needed] The tax applies to the greater increase in net interest margins from 2021 to either 2022 or 2023, beyond thresholds of 5% and 10%, respectively. It's designed as a temporary measure for fiscal year 2023, non-deductible against other taxes.
In reaction to initial market impacts, the government introduced a 0.1% asset-based cap on the tax, which stabilized banking shares somewhat. The rationale behind the tax is to fund initiatives that alleviate the cost-of-living crisis and support first-time homeowners. However, the tax is critiqued for potentially increasing loan costs, limiting lending, and distorting competition. Critics also argue that it targets normal profits rather than true windfalls, risking investment and economic stability.
In November 2022, the Dutch government introduced a temporary windfall tax as a strategic response to mitigate the impact of surging energy prices. This 33% tax targets companies operating within the oil, natural gas, coal, and petroleum refining industries. The tax applies to profits that exceed the average profit margins of these sectors by more than 20% during the reference period from 2018 to 2021,[20] as specified by the ministry. This measure is intended to buffer the financial shock experienced by consumers and stabilize market fluctuations in the energy sector.
As of 2009, in Sweden, hydroelectricity is subject to a property tax and nuclear power plants to a capacity-based tax.[21] While neither are windfall taxes, they were raised in 2008 due to higher windfall profits.[21] In 2009, Norway, where hydro-electric power plants supply 99% of the country's electricity, similarly imposed a ground rent tax on hydro-electric power plants to reduce their profits by 30%.[21] Finland announced its intention to tax windfall profits at nuclear and hydro plants in 2010 or 2011.[21][needs update] These plants have all seen their profits increase because of the European Union Emissions Trading System.[21]
Mongolia implemented in 2006 taxation on the profits made by mining companies operating in Mongolia.[5] A tax on unsmelted copper and gold concentrate produced in Mongolia, it was the highest windfall tax in the world.[22] The tax was repealed in 2009 and phased out over two years. Repealing the 68% tax law was considered essential to enable foreign mining companies to invest in mineral resources development of Mongolia.[6]
In the United Kingdom, an early one-off windfall tax was levied on certain bank deposits as part of the 1981 budget under Margaret Thatcher. In 1997, the government of Tony Blair introduced a Windfall Tax for privatised utility companies. In May 2022, Rishi Sunak introduced the tax for energy companies extracting oil and gas in the UK, to help fund a package to relieve the UK cost of living crisis.[23][24]
In 1980, the United States enacted the Crude Oil Windfall Profit Tax Act (P.L. 96-223) as part of a compromise between the Carter Administration and the Congress over the decontrol of crude oil prices.[25] The Act was intended to recoup the revenue earned by oil producers as a result of the sharp increase in oil prices brought about by the OPEC oil embargo. According to a report by the Congressional Research Service, the Act's title was a misnomer. "Despite its name, the crude oil windfall profit tax... was not a tax on profits. It was an excise tax... imposed on the difference between the market price of oil, which was technically referred to as the removal price, and a statutory 1979 base price that was adjusted quarterly for inflation and state severance taxes."[26][25] The report also stated that the tax only generated $40 billion in net revenue though it was projected to generate $175 billion, and because the tax was an excise tax on oil produced domestically in the United States and not imposed on imported oil, it reduced domestic oil production by 1-5% while dependence on imported oil increased by 3-13%.[26]
Finland's economic affairs minister, incensed the nation's largest industries and energy producers by announcing the introduction of a windfall tax on the profits of "large-sized" hydro-electric and nuclear generators. The windfall tax will be charged on plants built before the adoption of the Kyoto Protocol in 1997, and where revenue has increased due to the European Union's Emissions Trading Scheme (ETS).