When Chevron reported its highest quarterly profit in six years on July 31, 2026, it was only one part of a broader picture. Analyst firm Wood Mackenzie estimates that the global oil and gas industry is on track for a cash windfall of US$495 billion in 2026, representing profits above and beyond what the industry expected before the U.S.-Israel war with Iran began.

Three separate bills seeking to tax those profits are now in Congress, and President Donald Trump has said oil companies are “making too much money.”

As an applied microeconomist, I am often asked how taxes affect economic activity. Economists have long taken a more nuanced view of windfall taxes than either side of the current debate suggests. Supporters often make overly optimistic revenue projections, while opponents often overstate how much such a tax might discourage investment. A U.S. windfall-tax experiment from the 1980s is informative on both counts.

Other nations have this type of tax

In the U.K., a windfall tax on North Sea oil and gas — formally the Energy Profits Levy, introduced in 2022 after Russia's invasion of Ukraine drove up energy prices, and layered on top of existing levies to produce a combined rate of 78% on profits — is expected to generate an estimated 8 billion pounds in 2026, or about $10.8 billion, roughly double its 2024–25 revenue.

A similar European Union-wide tax, imposed as a one-time measure after Russia's 2022 invasion of Ukraine and formally labeled a “solidarity contribution,” raised 26.15 billion euros ($30 billion). Five EU countries are now calling for a second such tax in response to the Iran war.

How to tax a windfall

Many taxes are deliberately designed to change behavior. A windfall tax is different: It targets money that arises when a company makes the same production decision it was already planning to make before prices rose. The oil was going to be pumped regardless; the war simply made each barrel more valuable.

A textbook windfall tax would not apply to all profits, but only to the amount above a baseline level. Australia's Petroleum Resource Rent Tax and Norway's special petroleum tax are the closest working examples. Under those systems, companies deduct all costs — including exploration and investment — plus a normal rate of return before any windfall tax is owed.

In the U.S., the Crude Oil Windfall Profit Tax, enacted in 1980 as the oil price shocks that followed the 1979 Iranian revolution delivered sudden gains to domestic producers, was projected to raise $393 billion over its planned 10-year life. It was itself an excise levy on the gap between market prices and a government-set base price, not a tax on companies' reported profits. It ultimately raised about $80 billion before being repealed in 1988, or roughly one-fifth of the projection. After 1986, prices collapsed, domestic production was increasingly exempted, and the tax was generating almost nothing by the time it was repealed.

What Congress is considering

The bills now in Congress are structured very differently from the textbook model — and from one another.

A proposal by Sen. Sheldon Whitehouse of Rhode Island and Rep. Ro Khanna of California, both Democrats, would impose a 50% excise tax per barrel on the difference between the current average Brent crude price and the 2025 average of $69. With a July 2026 average of $84, a company would owe $7.50 per barrel, regardless of production costs or profitability.

A second bill, the Iran War Oil Crisis Windfall Profits Tax Act, introduced by Democratic Rep. Brad Sherman of California, is more aggressive. It would levy a 100% tax on the amount by which crude prices exceed $75 per barrel. At the July 2026 average of $84, companies would owe $9 per barrel. That tax would remain in effect only until hostilities end and prices fall below that threshold.

Both proposals are triggered by prices, not by any measure of underlying profit. A third proposal, the Taxing Buybacks from Big Oil Windfalls Act, by Democratic Sens. Ron Wyden, Chuck Schumer and Michael Bennet, takes a different approach: It would raise the excise tax on stock buybacks — a levy created by the Inflation Reduction Act of 2022 — from 1% to 25% for large oil and gas companies, targeting not the windfall itself but what companies do with it.

All three are Democratic bills, and any of them would have to clear both chambers of Congress and be signed by the president to become law. None follows the cost-and-baseline model used in Australia and Norway: the two price-triggered bills resemble the structure of the 1980 U.S. levy, while the buyback proposal sidesteps the windfall itself.

Where the money is going

The American Petroleum Institute has argued that proposals like these “erode the certainty needed to make investment” decisions. The Tax Foundation has warned that “taxing producers is the opposite of a solution to a supply crisis.” Neither side, however, has put a specific dollar figure on how much investment would actually be deterred.

The data points in a different direction. According to Wood Mackenzie, the 49 largest oil and gas companies will capture about $272 billion of the sector's windfall, or roughly 70% of their combined annual investment budgets. Yet investment spending has barely changed, stock buybacks are on course to fall, and dividends have remained flat. The cash is simply accumulating on balance sheets.

That is consistent with what economic research predicts: When a windfall does not change a firm's underlying investment opportunities, managers hold the cash and wait. In 2026, the industry is waiting for clarity on how long the war will last, whether prices have peaked and whether Congress will pass a windfall tax. The argument that such a tax would prevent important economic activity is weakening.

What the current proposals would mean

For oil companies, the direct effect is straightforward: Every dollar paid in tax is a dollar less in earnings. The indirect effect — discouraging investment — is likely weaker than usual because the windfall is not being invested now anyway.

For government revenue, the 1980 experience is a cautionary tale. Projections built on current prices tend to overstate what a tax will actually raise.

For consumers, a tax applied only to domestic production is largely borne by producers, while a tax that affects imports can raise pump prices.

The way the revenue is used also matters. Both the Whitehouse-Khanna and Sherman bills would rebate proceeds directly to households. The Whitehouse-Khanna proposal could provide an estimated $216 a year to a single taxpayer at $100-per-barrel oil, helping offset fuel costs, especially for lower-income families, who spend a larger share of their budgets on gas.

Whether the trade-off between taxing companies' war-driven windfall profits and the risks of market intervention is worth making depends on values as much as on financial estimates. People differ on how fair it is to let companies keep profits that result from war, and on how reliable projections of revenue raised and investment lost really are. Those are not questions economists alone can settle.

Tibor Besedeš, Professor of Economics, Georgia Institute of Technology

This article is republished from The Conversation under a Creative Commons license. Read the original article.

This story was originally featured on Fortune.com.