In its newly released budget plan, the Obama Administration calls for an additional taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. on oil of $10 per barrel. A budget document explains that the tax would actually be the “equivalent of $10.25 per barrel of crude oil” and that the tax rate would be indexed to inflation. The tax would be assessed on domestic and imported oil but exempt exported oil.
The Administration says much of the oil tax’s revenue would be used to help fund a proposed “21st Century Clean Transportation Plan” and 15 percent of the revenue would finance expanded federal aid to low-income families with high energy costs.
According to an Administration Fact Sheet, the 21st Century Clean Transportation Plan is based on the premise that, in the President’s words, “no challenge poses a greater threat to future generations than climate change.” The plan’s focus is green energy and it seeks to deemphasize highways and conventional automobiles. Among the plan’s clean energy initiatives are electric cars and charging stations, autonomous (i.e., self-driving) clean vehicles, public transit, high-speed rail including maglev, and grants to state and local governments to support “smarter, cleaner, more resilient transportation systems.” While some revenue from the $10 a barrel oil tax would also be directed to the highway system to “ensure we maintain the infrastructure we have,” the Administration underscores its priorities with a proposal to “replace the existing Highway Trust Fund with a new Transportation Trust Fund.” [Emphasis added.]
The budget documents and the Fact Sheet claim the new oil tax would be paid for by oil companies. The companies would certainly collect the tax. However, because the demand for oil is relatively inelastic, the oil companies would pass most of the tax forward to customers in higher prices. According to press reports that assume full forward shifting, the new tax would add about 25 cents to the price of a gallon of gasoline. The Administration also terms its proposal a “fee,” although calling it by a different name does not make it any less a tax.
Unlike a straight gas taxA gas tax is commonly used to describe the variety of taxes levied on gasoline at both the federal and state levels, to provide funds for highway repair and maintenance, as well as for other government infrastructure projects. These taxes are levied in a few ways, including per-gallon excise taxes, excise taxes imposed on wholesalers, and general sales taxes that apply to the purchase of gasoline. , the Administration’s proposed oil tax would also apply to many non-transportation uses of oil. The U.S. Energy Information Administration notes that less than half of the petroleum consumed in this country goes for gasoline, about one-third is made into diesel fuel and jet fuel, and approximately one-quarter finds its way into other uses. Some of those other uses are the plastics found in computers and smart phones, the asphalt in roofing shingles, essential lubricants in the operation of many consumer and industrial products, a variety of dyes, and energy for heating homes, generating electricity, and powering some manufacturing plants. It is puzzling the Administration presents the oil tax as part of a transportation plan, given that a significant share of the tax would fall on activities having little to do with transportation.
Modeling the tax
We employed the Tax Foundation’s Taxes and Growth (TAG) Model to estimate what effects the oil tax would have on the economy and on federal revenue. Based on the Administration’s description, this would be an excise tax, and we modeled it that way.
The Administration would phase in the tax over five years and grant a short-term reprieve to heating oil. But that relief would be temporary. Because we want to gauge the long-term impacts, the tax was modeled as fully phased in.
Economic effects
If the tax were to become law, it would push up production costs, and that would lead to less employment and capital formation. The Taxes and Growth Model estimates that, in the long run, the annual level of GDP would be 0.3 percent less than otherwise (an annual loss of $48 billion in terms of the 2015 economy), private business capital stocks (e.g., equipment, structures) would be 0.6 percent lower, and 137,000 full-time equivalent jobs would be lost. (See Table 1.)
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Table 1. |
|
|
GDP |
-0.3% |
|
$GDP (annual gain relative to 2015 economy, $ billions) |
-$48 |
|
Private Business Stocks (equipment, structures, etc.) |
-0.6% |
|
Wage Rate |
-0.5% |
|
Private Business Hours of Work |
-0.1% |
|
Full-Time Equivalent Jobs (in thousands) |
-137 |
|
10-Year Static Federal Revenue Estimate, 2015-2024 ($ billions) |
$394 |
|
10-Year Dynamic Federal Revenue Estimate after GDP Gain or Loss, 2015-2024 ($ billions) |
$331 |
|
Weighted Average Service Price |
|
|
Corporate |
0.0% |
|
Noncorporate |
0.0% |
|
All Business |
0.0% |
|
Source: Tax Foundation Taxes and Growth Model (October 2015 version). |
The model does not account for the fact that the oil tax would distort the mix of production inputs and outputs by increasing the price of oil and oil-using products relative to other inputs and outputs. Due to those relative price distortions, the damage from the tax would be somewhat greater than estimated here.
Distributional analysis
Many studies have concluded that gasoline taxes are regressive because gasoline purchases tend to be a larger share of income for the poor than the wealthy. The oil tax would probably also be regressive. We allocated the $10 per barrel tax across the income scale based on the findings in a distributional study by Prante. As expected, the tax burden falls steadily with income. (See Table 2.) For instance, under the static assumption that the tax has no effect on overall economic activity, the oil tax would lower after-tax incomes by 1.8 percent for the bottom 20% of tax filers, by 0.7 percent for the next 20 percent, and by 0.2 percent for the top 20 percent. On average, the loss of after-tax incomeAfter-tax income is the net amount of income available to invest, save, or consume after federal, state, and withholding taxes have been applied—your disposable income. Companies and, to a lesser extent, individuals, make economic decisions in light of how they can best maximize their earnings. would be 0.3 percent.
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Table 2. |
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All Positive Returns |
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by Quintile |
Static |
Dynamic |
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0% to 20% |
-1.8% |
-3.0% |
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20% to 40% |
-0.7% |
-1.5% |
|
40% to 60% |
-0.5% |
-1.3% |
|
60% to 80% |
-0.4% |
-1.0% |
|
80% to 100% |
-0.2% |
-0.7% |
|
90% to 100% |
-0.1% |
-0.6% |
|
99% to 100% |
0.0% |
-0.6% |
|
TOTAL |
-0.3% |
-0.9% |
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Source: Tax Foundation Taxes and Growth Model (October 2015 version). |
In the dynamic case, the losses are about half a percentage point higher because people would also be hurt by the weaker economy. For the same income groups mentioned above, the declines in after-tax income would be 3.0 percent for the bottom 20% of tax filers, 1.5 percent for the next 20 percent, and 0.7 percent for the top 20 percent. On average, losses would be 0.9 percent.
Revenue effects
In a conventional (static) revenue estimate, it is assumed that tax changes do not alter the economy’s growth rate and size. Applying the static constraint and assuming the oil tax is fully phased in, the Taxes and Growth Model estimates it would lift federal revenue by $394 billion over the budget window. However, in a dynamic analysis that takes account of the tax’s damage to the economy, the model estimates that about one-quarter of the static increase would be lost due to slower growth, reducing the federal government’s 10-year revenue gain to $331 billion. This gain to the government would be at the expense of the public in the forms of both their increased tax payments and a cumulative reduction in GDP of $349 billion over the 10-year period.
Conclusion
In deciding whether a tax is worthwhile, the tax’s costs should be compared to its benefits. The costs include both the direct cost, which is the amount people pay in tax, and indirect costs, such as reduced growth, due to tax distortions. The Taxes and Growth Model does not attempt to measure the potential benefits of the oil tax, but opinion surveys suggest the public attaches less value to the types of spending in the plan than does the Administration.
The Administration is describing its proposed oil tax as part of a transportation plan, and many people, if they do not read the fine print, may assume the tax dollars would be channeled into more money for highway maintenance and improvement. There is considerable public support for increased roadway funding because highway congestion is a large, ongoing expense in time and dollars for so many people. However, one recent survey found that public support drops by more than half if a tax is described as being for a range of transportation projects. It would not be surprising if the public saw still fewer benefits from imposing a new oil tax to fund a program that “builds on the success” of the 2009 stimulus package by prioritizing public transportation, alternative fuels, futuristic transportation options, and low-income assistance.
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