Energy Taxes: What They Are, What They Cost

Many economists expect that one of the first taxes President Clinton will call for--as early as Wednesday’s economic speech to Congress--will be some form of energy tax. Treasury Secretary Lloyd Bentsen raised the idea again recently by suggesting that a hike in the federal gasoline tax, which has been recommended by some Clinton advisers, was less likely to be picked by Clinton than what he termed a “broad-based energy tax.” Then, late in January, Sen. Bennett J. Johnston (D-La.) introduced a bill to impose a fee on imported oil.

Energy taxes are attractive revenue producers. Relatively small increases can raise enormous amounts of money. A 5% tax on all energy consumption, for example, would create an extra $18 billion a year in federal revenue, according to the Congressional Budget Office. And energy taxes can be collected from producers as well as from consumers, which can mean less public resistance than tariffs collected on gasoline at the pump.

Beyond this, an energy tax is popular with many environmentalists, economists and many in the Clinton Administration because it could raise revenue and be designed to reduce foreign oil imports while increasing reliance on domestic natural gas.

“We should be shifting our overall tax structure,” says Daniel A. Lashof, a senior scientist with the Natural Resources Defense Council. “We should reduce taxes on income and investment and replace those revenues with taxes on pollution and energy consumption.”

Some basic questions about energy taxes.

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Q. What is a broad-based energy tax?

A. Traditionally it means a tax applied equally to all forms of energy, including oil, natural gas, coal, nuclear power and hydroelectricity. Sometimes it is used more narrowly to apply only to fossil fuels--oil, natural gas and coal. Electric power from turbines powered by any of these fuels would probably not be taxed, since the original energy source would already have paid the tariff.

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Q. How would an energy tax be figured?

A. Several ways are possible. Reportedly, the Clinton team favors a tax on the energy content of each fuel, calculated in cents per million British thermal units, or BTUs. For fossil fuels, this tax could be collected from oil companies and other producers. Because there is no equivalent way of measuring the energy input of water and uranium, a comparable tax on energy output--measured in kilowatt hours--would have to be applied to nuclear and hydroelectric power. Another form of energy tax would levy a flat percentage of the price of each fuel, something like a sales tax, collected from producers or consumers. Many environmentalists favor taxing the carbon content of fossil fuels, citing carbon dioxide’s role in global warming. More narrow energy taxes could be applied only to imported oil or gasoline.

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Q. What would the effect be on energy sources?

A. Different tax schemes favor different energy sources. A tax on BTUs falls hardest on coal because $1 worth of coal has more BTUs than $1 worth of oil or natural gas. A tax on carbon would also raise coal prices more than other fuels because it is the most concentrated carbon source. A flat percentage tax on price would hit oil companies the hardest because the BTUs in oil are already priced higher in the marketplace. Oil would also be the only fuel to experience a retail price hike under a gasoline tax increase or an oil-import fee. The American Petroleum Institute, which represents the big U.S.-based oil companies that do most of the importing, opposes an oil-import fee. Independent U.S. producers, whose fields are almost entirely domestic, strongly support a fee on imported oil.

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Q. How would ordinary consumers be affected?

A. Critics of energy taxes say they are regressive because they tax necessities that make up a larger percentage of poor or middle-class incomes than those of the rich. Supporters counter that such inequities can be offset with other tax breaks. But these offsets, say critics, also dilute some of the effect of an energy tax. “If you talk about making them non-regressive, you’re not going to raise any money,” says Robert S. McIntyre, director of Citizens for Tax Justice, which represents labor unions and some public-interest groups.

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Q. What about prices for consumers?

A Many consumer groups consider a BTU-based tax the fairest because it spreads the load more evenly over all fuels and all parts of the country. For the fuel cost most visible to consumers--the price of gasoline--by federal estimates at today’s prices a BTU tax that raised $10 billion a year would add about 2 1/2 cents to a gallon of gas at the pump. Raising $10 billion with a percentage tax on fuel prices would add about the same. Generating the same revenue with a narrower gasoline tax would raise gas prices by about 10 cents, while a carbon tax would add about 2 cents a gallon.

What Energy Tax Schemes Would Cost

Many economists expect the Clinton Administration to propose a tax on energy. Different tax schemes would bring different price increases to consumers. All these proposals would raise $10 billion per year. Figures below show the proposed tax increase and the annual cost hikes per capita* for each energy source. Overall, the U.S. Bureau of Labor Statistics estimates that the average U.S. household spends $2,150 a year on energy. By some estimates, a $10-billion energy tax would cost that household about $100 more per year regardless of which scheme is chosen.

Gasoline Natural gas Tax Tax Annual per 1,000 Annual Proposed tax per gal. cost cubic ft. cost A BTU tax $0.025 $11.13 $0.12 $9.00 Fuel price tax 0.025 $11.13 0.09 $6.75 Carbon tax 0.02 $8.90 0.10 $7.50 Gasoline tax 0.10 $44.52 not applicable Oil import fee 0.11 $48.97 not applicable

Nuclear, Coal hydroelectric Tax Tax Annual kilowatt Annual Proposed tax per ton cost hour cost A BTU tax $2.50 $8.75 $0.001 $3.51 Fuel price tax 1.15 $4.03 0.001 $3.51 Carbon tax 3.50 $12.25 not applicable Gasoline tax not applicable not applicable Oil import fee not applicable not applicable

* The per capita use is based on total U.S. energy use, including commercial and industrial users, since these would be expected to ultimately pass on any tax increases to individual consumers. Costs to individuals could vary widely based on heating use and driving distances. Also, per capita numbers include non-users. For instance, while the per capita cost of a gasoline tax hike of 10 cents may cost consumers $44.52 a year per capita, the practical cost is to drivers only--$100 a year, according to petroleum industry estimates.

Source: U.S. Department of Energy, U.S. Environmental Protection Agency, American Petroleum Institute, Highway Users Federation. All figures are for 1991, the latest available.