Energy tax fails fairness test

As the Clinton Administration assembles its economic package for the President’s state of the union address on February 17, it’s clear the package will include new taxes. There will certainly be the promised “tax on the rich.” But an energy tax of some kind also appears likely.

Because energy fuels our industrial and transportation systems, provides jobs and heats and cools our homes, it’s a risky proposition to increase the cost of basic resources by increasing energy taxes. Several taxes are under consideration: a sales tax on energy; a tax on the amount of energy produced by each energy source (a BTU tax); a tax on greenhouse gas emissions by each energy source (e.g., a carbon tax); an oil import fee; and a gasoline tax.

If we take seriously the Clinton administration’s admonition that any new taxes should be fair and balanced, nearly any tax on energy fails these tests.

  • Energy taxes fail the fairness test because energy taxes are regressive. Poor and lower income people use energy for transportation and home heat just like the wealthy. But an energy sales tax, a BTU tax or a gasoline tax would take a much bigger bite out of the earnings of lower income people.
  • Energy taxes also fail the test of balance. First and foremost, energy represents between 4 and 8 percent of the U.S. economy, depending on how you count. So, the phrase “broad-based energy tax” is an oxymoron. It doesn’t make sense to impose on one small sector of the economy most of the burden for increasing government revenues — and particularly a sector where lower costs give ordinary people more disposable income and increase U.S. competitiveness. If Clintonomics requires a broad-based tax, let them try an across-the-board, value-added consumption tax, which also has clear advantages in international trade.

In addition, most energy taxes create regional economic imbalances. An oil import fee hurts the Northeast and the Midwest, where fuel oil is widely used for home heating. A gasoline tax hurts the West, which has long distances between population centers. Carbon taxes have severe regional impacts. The national interest is not served by an energy tax policy that pits region against region.

The most troubling tax is the carbon tax, proposed by many to raise revenues and to “stabilize” greenhouse gas emissions. Problem: a carbon tax in the U.S. may actually increase total greenhouse gas emissions on a global basis. It could also shrink the economic pie at home so that fewer net revenues would be collected by the federal government.

Because the burden of a carbon tax would fall most heavily on coal chain industries — mines, coal-fired power plants and railroads — a carbon tax would hit particularly hard on the economies of coal producing states such as Wyoming, North Dakota, Montana, Utah, Colorado, West Virginia and others. Specifically, a carbon tax would result in:

  • reduced employment in high wage coal chain industries;
  • greater U.S. dependence on oil imports from politically unstable regions, increasing the trade deficit and the risk of war;
  • higher U.S. consumer prices, especially for electricity, as the nation is forced to write off investments in coal mines, coal-fired power plants and unit trains that deliver clean Western coal into the South and the Midwest;
  • shrinking overseas market opportunities for American exporters due to decreased competitiveness.

An energy tax is a bad idea. Right now, energy tax policy is on fast-forward, but “ready, fire, aim” won’t work in energy policy making any better than it does in selecting an Attorney General. Let’s hope cooler heads prevail between now and February 17.

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