Former Treasury Secretary Advocates for Full Windfall Tax on Gas Profits
Former Treasury secretary Ken Henry has strongly dismissed claims from major gas corporations that implementing tax changes would freeze investment in new Australian gas projects. In a submission to a parliamentary inquiry examining the gas taxation regime, Henry labelled such warnings as "self-serving" and urged the Albanese government to ignore them as it considers interventions ahead of next month's federal budget.
Economic Justification for a 100% Windfall Profits Tax
Henry argued that a windfall profits tax set at "approximately" 100% is "socially optimal." He explained that windfall gains—large and sudden profit increases often driven by external factors like conflicts—should be taxed heavily. For instance, gas companies experienced a significant revenue surge after Russia's invasion of Ukraine in 2022, which caused global prices to spiral upwards.
"Any proposal to generate more tax revenue from windfall gains accruing to foreign owners of capital will draw self-serving criticism from those supplying the capital, for the most part, the CEOs of multinational corporations," Henry wrote in his submission. He emphasised that any investment proposal meeting its cost of capital without such a tax would still do so with the tax in place, calling this an economic tautology.
Historical Context and Current Pressure
Henry was the author of the 2010 review that recommended the Rudd government introduce a 40% mining super profits tax. Although this tax was later watered down by Julia Gillard and abolished under Tony Abbott, Henry contends that the justification for it remains valid 16 years later. He suggested revenue from a windfall tax could be invested in a sovereign wealth fund, used for nature repair, or to reform personal income and corporate taxes.
"Since the burning of fossil fuels has been a major, and increasing, cause of nature loss, there is a strong case for using some of the proceeds of a windfall gains tax to undertake nature repair," Henry stated.
The federal government faces growing pressure from Labor-aligned trade unions and crossbenchers to introduce a flat 25% tax on gas exports, which the Australia Institute thinktank estimates could raise $17 billion annually. Recent revelations that Treasury was modelling a windfall profits tax and changes to the petroleum resource rent tax (PRRT) have fuelled speculation about potential budget measures.
Industry Opposition and Government Caution
Oil and gas companies, including Chevron, BP, Conoco Phillips, and Shell, have defended the existing tax regime in submissions to the Greens-led inquiry. They warn that changes could threaten investment in new projects. Research commissioned by Australian Energy Producers claimed a 25% export levy would render projects "uninvestable."
BP wrote in its submission that new tax changes would undermine investment cases by increasing costs and uncertainty, potentially leading to reduced production or early project shutdowns. However, the government's appetite for major interventions appears to have diminished amid the global energy crisis sparked by the Iran war. Prime Minister Anthony Albanese, during a trip to Singapore, emphasised that the government's energy priority is "supply, supply and supply," indicating a cautious approach to avoid perceptions of threatening future LNG supplies to Asian trading partners.
Inquiry Timeline and Broader Implications
The parliamentary inquiry will hold public hearings in Canberra and Perth next week before reporting its findings on 7 May, just five days prior to the federal budget on 12 May. This timing adds urgency to the debate over gas taxation and its potential impact on Australia's economy and energy security.
Henry's stance highlights a significant divide between economic experts advocating for higher taxes on supernormal profits and industry leaders warning of investment freezes. As the government weighs its options, the outcome could shape Australia's fiscal policy and energy sector for years to come.
