Last week, President Obama’s 2017 budget proposal attracted heightened attention because a pre-release White House briefing revealed that it included a $10/ barrel oil tax. It was initially described by staffers as a “fee,” but that term got lost in the President’s comments. The tax would be phased-in over five years to fund a “21st Century Clean Transportation System,” aka, infrastructure and clean energy projects. The idea is, of course, dead on arrival, but it’s worth thinking through.
We’re uncomfortable about the whole idea of earmarking specific taxes for specific spending areas. This is known in economist-speak as “hypothecation,” and it is a recipe for growing government. Tying specific taxes to specific spending—as we do for Social Security and Medicare debates—creates the illusion that those services are paid for separately, and are somehow excluded from any larger debate over spending priorities.
Another problem is apparent from the perennial Highway Trust Fund crisis. If the dedicated tax revenue is not sufficient for programmatic needs, massive infrastructure projects are put at the mercy of annual Congressional appropriations, which is precisely the problem that dedicated revenues were designed to avoid.
Because tying tax revenues to spending programs allows politicians to add dessert to the plate of spinach, this sort of thing goes on all the time. It is not the sort of thing, however, that analysts should cheer.
The tax would likely raise $500 billion over 10 years, dwarfing even the $90 billion spent in the 2009 Recovery Act. The comparisons to that spending (quoted approvingly in the White House fact sheet) hardly provide comfort that the money will be well spent or that the promised jobs will actually materialize.
The administration claims that the tax will be paid “by the oil companies.” That may be true in terms of who signs the checks (as it is in the case of the existing federal gasoline tax). It is absurd, however, to suggest that the equivalent of a 30% tax on the price of crude oil would not be reflected, almost cent for cent, in the price of gasoline at the pump.
Anyone who has studied the subject understands that the tax—which works out to about 25 cents per gallon—will not be high enough to have any significant impact on either the demand for gasoline or the emissions of greenhouse gases in the transportation sector. However, it will be plenty high enough to price U.S. gasoline out of world markets, so say goodbye to the $90 billion/year boost to our balance of payments generated by the massive increase in U.S. exports since 2010.
Finally, the export and import situation gets very complicated. Some reports have the White House Economic Adviser quoted as saying that the tax would not apply to U.S. crude exports. Really? How is a Congressman going to tell his constituents that he voted to make U.S. crude cheaper in China than it is in Texas? And if the tax does apply to oil destined for export, so much for the year-end “compromise” which allowed oil exports as part of the spending bill. In that case, U.S. crude would be hopelessly uncompetitive internationally. Meanwhile, imported gasoline (made from untaxed foreign crude), would suddenly become very attractive relative to gasoline refined in the United States. This is energy independence in high-speed reverse.
The proposed tax has one very important upside, however: It takes the implicit carbon tax that the Clean Power Plan is imposing on the power sector (about $23 per ton) and applies it at the very same rate (a $10 tax on a barrel is equivalent to a $23 tax on a ton of carbon) on the transportation sector. Voila! A relatively uniform national price on carbon! It’s not perfect. Carbon prices in the electricity sector will be delivered by cap & trade regimes (where prices are volatile) while the carbon prices in the transportation sector will remain steady. Even so, it’s less costly and more efficient to secure greenhouse gas emissions reductions by addressing them wherever they occur than it is by addressing them in only targeted industrial sectors.
So what can be done to improve the administration’s tax idea? First, it should be widened to all fossil fuels and, since one of the President’s objectives is to discourage consumption of those, do it with a carbon tax. Second, abandon hypothecation. Use the money to cut other taxes. If there is a case for expanded infrastructure spending, identify other spending priorities that can be reduced to pay for it. Finally, recognize that any policy that does not reflect the international competition U.S. companies face is doomed to fail.
A revenue neutral $25 per ton carbon tax, with a border adjustment, would fit the bill nicely. Applying it economy wide, and to all fuels, would also make EPA’s Clean Power Plan and the coming greenhouse gas regulatory morass—which may not survive legal challenge in any case—unnecessary.