Windfall Profits Tax and Energy Security Trust Fund Message to the Congress.

To the Congress of the United States:

On April 5, I announced the phased decontrol of oil prices beginning on June 1 of this year, and ending with the expiration of price control authority on October 1, 1981. The decontrol program I have established will increase domestic oil production, encourage conservation of existing energy supplies, and make it possible to accelerate development of alternative energy supplies and thereby lessen our dangerously heavy reliance on imported foreign oil.

To prevent unearned, excessive profits which the oil companies would receive as a result of decontrol and possible future OPEC price increases, I proposed a windfall profits tax. I further proposed that the revenues generated by that tax be used to establish an Energy Security Trust Fund which will have three major purposes:

• to provide assistance to low-income households who can least afford energy price increases;

• to increase funding for mass transit; and

• to undertake a major program of new energy initiatives and investments which will permit us to develop critically needed alternatives to imported oil.

This Message sets out the detailed specifications of the windfall profits tax and the Energy Security Trust Fund. I look forward to working closely with you to act on this proposal as quickly as possible.

THE WINDFALL PROFITS TAX

SUMMARY OF THE WINDFALL PROFITS TAX

Under the Energy Policy and Conservation Act of 1975 (EPCA), which amends the Emergency Petroleum Allocation Act (EPAA), all authority to control the price of domestically-produced crude oil expires on September 30, 1981. However, as of June 1, 1979, the amount by which oil prices may increase becomes discretionary with the President.

The Department of Energy has been directed to undertake administrative actions designed to phase out controls on all domestic crude oil by September 30, 1981. Department of Energy regulations implementing some of these changes were published in the FEDERAL REGISTER on April 12, 1979 (44 FR 22012). The phased decontrol program will begin as of June 1, 1979 and will extend through September 30, 1981.

In order to prevent oil producers from reaping excessive profits from decontrol a windfall profits tax is proposed. This tax would apply to windfall revenues from sales of lower and upper tier oil which are attributable to decontrol and to revenues from the sales of domestic crude oil which are attributable to any future OPEC price increases in excess of adjustments for inflation.

The gradual deregulation of domestic oil prices will bring 'the price of oil to world oil price levels, with the following benefits: First, it will eliminate the current subsidy provided to imported oil, which has increased consumption and dependence on foreign supplies. Second, it will encourage producers of oil to seek out additional supplies and to continue production from marginally economic operations. Third, decontrol will phase out the complex system of controls which presently produces inequities and inefficiencies. Fourth, through replacement cost pricing, new sources of energy will come into commercial use, further reducing U.S. dependence on foreign oil. Fifth, it will strengthen the stability of the dollar and reduce balance of payment flows, both directly through reduced oil payments abroad and indirectly through confidence that the U.S. is attacking its energy problem.

However, deregulation of domestic oil prices will also provide enormous windfall gains for domestic producers of oil. These windfall gains will be generated by two aspects of deregulation: First, there are those gains which will result from the lifting of price controls on lower and upper tier oil. Producers of lower tier oil (controlled at an average price of $5.75 per barrel in January of 1979) will be able to sell increasing volumes of their oil at upper tier prices (controlled at an average price of $12.66 per barrel in January of 1979). At the same time, the controlled price of upper tier oil will be allowed to rise gradually to the world price.

Second, there are those gains that may result from the future actions of the OPEC cartel.

It is estimated that deregulation will increase domestic oil producer income before tax by $1.0 billion in 1979, $5.0 billion in 1980 and $9.3 billion in 1981. In order to capture the windfall portion of these increased revenues, a windfall profits tax of 50 percent is proposed. The proceeds of the tax and of increased income tax revenues attributable to higher producer profits during the deregulation period will be allocated to an Energy Security Trust Fund, described later in this Message.

The tax is designed to reduce to the greatest possible extent the complexity and excessive regulation associated with the existing price control mechanism. The entitlements program will be phased out. For purposes of administering the tax it will no longer be necessary to police the price at which oil and oil products are sold. The records that are to be kept will, in large part, be the same records that taxpayers are required to retain for income tax purposes. Finally, because the volume of oil at the lower tier and the upper tier base price will both phase out, only a simple tax will remain in place permanently.

THE DECONTROL SCHEDULE

The phased decontrol schedule is as follows:

• As of June 1, 1979, newly discovered oil will be permitted to receive the world market price.

• The Department of Energy has promulgated a rule under which, as of June 1, 1979, a substantial percentage of production from marginal properties may be sold at the upper tier price. The base production control level against which current production volumes are measured to determine upper tier volumes each month for marginal properties are set at 20 percent of the average monthly production and sale of lower tier crude oil from marginal properties. Marginal properties are those properties which produced below a certain volume of oil per well per day depending upon the average completion depth of all crude oil producing wells on such properties. The schedule of average well depths and average daily production volumes used to determine a marginal property are:

Under 20 barrels/day between 2,000 and 4,000 feet

Under 25 barrels/day between 4,000 and 6,000 feet

Under 30 barrels/day between 6,000 and 8,000 feet

Under 35 barrels/day below 8,000 feet.

• On January 1, 1980, the base production control levels for marginal properties will be reduced to zero and all current production will be eligible for the upper tier price.

• Effective June 1, any incremental new production from wells employing specified enhanced recovery techniques (e.g., tertiary recovery), may receive the world price. Beginning on January 1, 1980, producers who invest in enhanced recovery projects after June 1 may release specified volumes of lower tier oil to the upper tier price in order to finance that investment.

• Beginning on January 1, 1980, the upper tier oil price will increase in equal monthly increments until it reaches the world price on October 1, 1981.

• The Department of Energy has promulgated a rule under which base production control levels for all properties other than marginal properties will be permitted to decline lower tier oil at a rate of 1 1/2 percent per month from January 1, 1979 through December 31, 1979. Between January 1, 1980 and October 1, 1981, the decline rate will equal 3 percent per month.

TECHNICAL EXPLANATION OF THE WINDFALL PROFITS TAX

1. Imposition of Tax

An excise tax will be imposed at the wellhead on the owners of property interests in domestic crude oil (i.e., producers and royalty owners). The tax will not be imposed upon royalties paid to the Federal government. The tax will be withheld and paid over by the person having responsibility for settling with the various property interest owners under a division order. This is generally the first purchaser.

The person having responsibility for withholding and paying over the tax will deposit the tax semi-monthly with authorized depositories. That person will be required to file quarterly returns setting forth the amount collected and deposited for the return period.

Production from the Alaska North Slope (and any other oil transported through the TAPS line) is excluded entirely from the tax. This is because the transportation costs of bringing this oil to market are high, and the actual price received at the wellhead by producers of such oil is significantly below the upper tier price level.

Since the windfall profits tax is an excise tax, it is deductible for income tax purposes.

2. Amount of Tax

One tax is to be imposed at a rate of 50 percent. The tax is to be imposed on the difference between the price at which each taxable barrel of oil is sold and its base price, multiplied by the volume of oil subject to tax. There are three base prices: the controlled price of lower tier oil; the controlled base price of upper tier oil; and, for the production of unregulated oil, the market incentive price.

3. Oil Subject to Tax

( a ) Definitions

The windfall profits tax applies only to crude oil produced in the United States. For this purpose, the United States includes Puerto Rico, all United States possessions and the Continental Shelf.

The terms "crude oil", "lower tier oil", "upper tier oil", "stripper well", and "marginal well" will be defined in the same manner as those terms are defined by current Department of Energy regulations.

(b) Effective date

The tax is to be effective on January 1, 1980. It is a permanent tax.

(c) Tax bases

Lower tier. Under the President's decontrol schedule, lower tier oil will be released to the upper tier price in accordance with a decline rate applied to the producer's base period control level (BPCL). The BPCL is determined as of January 1, 1979 under recently issued Department of Energy regulations. For decontrol purposes, the decline rate is l 1/2 percent per month during 1979, and 3 percent per month thereafter.

The taxable volume of lower tier oil will be the volume of lower tier oil freed to the upper tier under decontrol which exceeds the volume of oil which would be freed by reducing the January 1, 1980 volume of lower tier oil by 2 percent of the BPCL per month.

For purposes of computing taxable volume, the 2 percent reduction continues even after price controls expire on September 30, 1981. Consequently, the taxable volume of lower tier oil equals zero at the end of May, 1983.

For purposes of computing the tax on lower tier oil, the base price is the controlled price of lower tier oil. Thus, oil which is now selling below its controlled price will be taxed only on the difference between the former controlled price and the price at which it is sold when freed to the upper tier.

For the period following the termination of controls, a constructive lower tier controlled price, generally based upon the present Department of Energy regulations, will be used in computing the lower tier base price. The constructive lower tier base price will be adjusted for inflation (as measured by the GNP deflator) by the Secretary of the Treasury in the same manner as the controlled price is currently adjusted for inflation under Department of Energy regulations.

Any lower tier oil released to the upper tier under decontrol and not includible in the lower tier taxable volume will be included in the upper tier taxable volume and will be taxed at that level.

The computation of the windfall profits tax at the lower tier level is illustrated by the following example:

Producer A's BPCL for lower tier oil as of January 1, 1979 is 100X barrels per day. Under the Department of Energy decontrol schedule the volume of oil subject to lower tier prices on December 31, 1979 will be 82X barrels per day (100X barrels per day less 18X barrels per day representing a 1 1/2 percent decline for the 12 months of 1979). During January, 1980 A produces 83X barrels per day. Of that production, 4X barrels can be sold as upper tier oil, since the lower tier volume for January 1980 is 79X barrels per day. One X barrels per day, the difference between the application of the 3 percent decline permitted under the Department of Energy decontrol schedule and the 2 percent decline permitted for purposes of computing the lower tier taxable volume, is the taxable volume of oil. Thus, if the controlled price of lower tier oil in January 1980 is $6 per barrel and the 1X taxable barrels per day are sold at the wellhead for $13 per barrel, the amount of tax would be equal to: 50 percent X (IX barrels per day X 31 days) X ($13 per barrel—$6 per barrel) $108.50X. The other decontrolled oil produced in January 1980 (31 days X 3X barrels per day) will be included in the upper tier taxable volume.

The lower tier taxable volume will not include marginal well production nor production that is released beginning on January 1, 1980 in order to finance investment in tertiary recovery. However, this production is included in the upper tier taxable volume. The lower tier taxable volume also will not include production from wells that would be considered to be stripper wells had controls continued beyond October 1981. However, this production is included in the market incentive tier taxable volume.

Upper tier. The windfall profits tax will apply to all upper tier oil beginning on January 1, 1980. The taxable volume of upper tier oil includes all upper tier oil except oil subject to tax at the lower tier level. Under the Department of Energy decontrol schedule, beginning on January 1, 1980, the upper tier oil price reaches the world price on October 1, 1981. For purposes of the tax, the controlled base price of upper tier oil is the price at which upper tier oil would be controlled if the Department of Energy decontrol schedule had not been implemented. This constructive upper tier controlled base price will be adjusted for inflation (as measured by the GNP deflator) by the Secretary of the Treasury in the same manner as the controlled price is currently adjusted for inflation under Department of Energy regulations.

The tax at the upper tier level is computed by applying the 50 percent rate to the upper tier taxable volume, multiplied by the difference between the price at which upper tier oil is sold and its controlled base price.

As in the case of lower tier oil which is now selling below its controlled price, upper tier oil will be taxed only on the difference between its controlled base price and the price at which it is sold.

The constructive upper tier base price will increase in monthly increments beginning in November 1986 so that over a 50-month period the difference between the upper tier controlled base price and the market incentive price (see below) will disappear. Consequently, at the end of the 50-month period, the upper tier tax base will be phased out. The Secretary of the Treasury will prescribe by regulations the applicable monthly increments.

The upper tier tax base will not include new production or incremental tertiary production.

Market incentive tier. The market incentive tier tax will be based on the difference between the price at which the uncontrolled oil is sold and the market incentive base price. The market incentive base price for the fourth quarter of 1979 is $16.00 per barrel. This base price will be adjusted for domestic inflation (as measured by the GNP deflator) and determined by the Secretary of the Treasury on a quarterly basis.

The taxable volume of the market incentive tier includes all uncontrolled oil except any oil subject to tax in the lower or upper tier taxable volume and Alaska North Slope oil. The tax at the market incentive tier is computed by applying the 50 percent rate to the taxable volume, multiplied by the difference between the price at which the oil is sold and the market incentive base price.

4. Application of Other Tax Provisions

For purposes of computing percentage depletion, gross income is reduced by the amount subject to the 50 percent windfall profits tax.

5. Revenue Effect

The gross windfall profits tax will equal $0.4 billion in fiscal year 1980, $1.8 billion in fiscal year 1981, and $3.0 billion in fiscal year 1982. The net windfall profits tax (after reduction for income tax deductions of the excise tax and gain from disallowance of percentage depletion) will equal $0.2 billion in fiscal year 1980, $1.3 billion in fiscal year 1981, and $2.0 billion in fiscal year 1982.

THE ENERGY SECURITY TRUST FUND

SUMMARY OF THE ENERGY SECURITY TRUST FUND

The Energy Security Trust Fund is proposed to be established by statute in the Treasury of the United States to receive on a regular basis the revenues from the windfall profits tax and to receive for fiscal years 1980, 81, and 82, an additional amount to be appropriated from general revenues which will be based on an estimate of additional income taxes paid in 1980, 81, and 82 resulting from decontrol. The Administration will request an appropriation as soon as the windfall profits tax is enacted. The revenues in the Trust Fund will be used for three basic purposes:

• not to exceed $800 million annually for assistance to low-income households;

• not to exceed $350 million annually for additional funds for energy efficient mass transit purposes; and

• a range of energy program initiatives, including those set forth in the White House Fact Sheet issued on April 5, 1979, and additional initiatives, for long-term energy R&D, conservation, and energy-related environmental R&D, which Trust Fund revenues will support.

The Energy Security Trust Fund programs will be undertaken only if the windfall profits tax is enacted and provides (along with the additional corporate income taxes for fiscal years 1980, 81, and 82) revenues adequate to cover full costs. The Trust Fund is being proposed to insure that all revenues resulting from decontrol are used for the specified purposes.

TRUST FUND STRUCTURE AND OPERATION

The Energy Security Trust Fund will be established by statute and will be credited with revenue from two sources:

• all revenues actually received from the windfall profits tax on domestic crude petroleum less tax credit reimbursement; and

• additional income taxes that are estimated by Treasury to be collected as a result of phased decontrol during fiscal years 1980, 81, and 82.

The assistance to low-income households will be given priority on Trust Fund resources.

The total estimated costs for approved Trust Fund initiatives will not be permitted to exceed available resources within the Trust Fund. Total cost estimates by fiscal year will be developed for the expected life of each proposed initiative. The total for all proposed uses of the Trust Fund shall not exceed expected revenue estimates under constant world oil price assumptions.

The estimated out-year costs of approved initiatives will be calculated by year from the first year of the Trust Fund's operation to insure that revenues are adequate to meet commitments. This is necessary because of the substantial outyear costs of certain initiatives such as the shale oil tax credit and the uncertainty about revenues beyond 1985. To the extent that projected resources are in excess of projected commitments, additional energy initiatives which contribute to reducing United States dependence on imported oil may be undertaken. Purposes may include: energy research, development, demonstration, energy related environmental R&D, conservation, etc. All spending from the Trust Fund will be subject to authorization and appropriation in the annual budget process.

The Treasury Department will be responsible for holding the Trust Fund and for current year and long range revenue estimates and for tax expenditure estimates. The extent of resources in the Trust Fund which shall be available for new initiatives shall be determined on the basis of estimates, by fiscal year, of receipts and revenue foregone made by the Secretary of the Treasury, and the total costs of all other demands upon the Trust Fund as determined by the Office of Management and Budget.

Office of Management and Budget responsibilities will include:

• completing reviews of proposed new initiatives and determining whether adequate revenues exist for new initiatives to be undertaken and making recommendations to the President;

• providing annual projections of budget authority and outlays for the life of each approved spending initiative; and

• providing an annual report to the President and Congress describing the operation of the Trust Fund and the projections of future balance.

The Department of the Treasury will be responsible for:

• an estimate for the FY 80-FY 82 period of the amounts of added income taxes paid in consequence of the President's decontrol decision;

• annual estimates of the tax expenditures and foregone excise tax revenues (if any);

• long range revenue estimates updated annually, based on constant real world oil prices; and

• Trust Fund accounting.

Line agencies will be responsible for developing annual budget estimates for approved initiatives, proposing new initiatives for energy purposes if adequate Trust Fund balances are estimated to exist by OMB, justifying Presidentially approved requests before Congress and implementation of appropriated programs. The Department of Transportation will be responsible for developing and implementing the additional mass transit assistance program. The Department of Energy will be responsible for developing and implementing through the normal budget process the energy initiatives specified by the President and other initiatives to the extent permitted by Trust Fund balances estimated by the Office of Management and Budget.

REPORT TO CONGRESS

Each year a full report on Trust Fund projections and activities, will be transmitted to Congress along with any required specific authorization and appropriation requests for approved spending initiatives.

CONCLUSION

Prompt enactment of legislation built on these specifications is essential to a sound energy policy for the future of our country. This initiative is one of the most important of my Presidency.

Taken together, the windfall profits tax and the Energy Security Trust Fund will provide us with the means to move ahead to maximize domestic energy production, to establish stronger conservation habits, and to build toward the day when our reliance on imported oil no longer threatens the very security of this Nation. It will do so in a way which is fair and equitable and which protects the neediest in our society.

The Members of my Cabinet and Senior Staff and I look forward to working with each of you in the Congress to ensure that these vital proposals are quickly and fully enacted.

JIMMY CARTER

The White House,

April 26, 1979.