Clinton Sputtering Over Energy Taxes

What’s ahead for energy and taxes and what’s behind the confusing wrangle in Washington over energy taxes and President Clinton’s economic program?

Some kind of gasoline tax lies ahead, possibly coupled with fees on imported oil--which might be imposed just as a new global oil glut causes energy prices to fall sharply.

But it’s hard to say anything for sure about taxes because politicking will go on for weeks in the Senate and then in conference with the House of Representatives.

Meanwhile the White House’s original energy proposal--to tax fuels based on their heat, or BTU content--ran into a wall of opposition and won’t survive. It was a case of good intentions failing to recognize practical reality.

Once upon a time the Clinton Administration had a bright idea that an energy tax could raise money for the federal deficit and help the environment at the same time. To the President and his advisers it seemed a simple matter of taxing all energy but levying a lower rate on natural gas than on oil and coal.

You can see how that sounded reasonable--not only is natural gas an environmentally cleaner fuel but it is abundant in the United States. Greater use of natural gas could reduce U.S. dependence on imports. Thus was born the BTU tax.

But achieving environmental or social goals by using the tax system is never easy, and this attempt was particularly complicated. First of all, because the tax adversely affected coal, the White House ran into opposition from Sen. Robert F. Byrd, the powerful West Virginia Democrat who heads the Senate Appropriations Committee. He won an immediate concession for coal.

Then other complications arose because the White House tried a tricky maneuver. The Administration designed the BTU tax so that it would be collected from energy producers and energy-using industries. That way consumers might not blame the government when gasoline prices and electric bills went up. But producers and industries objected, and the White House was forced to make scores of exceptions to the tax.

Objections to the tax were well-founded. In one significant case, higher taxes on heavy industrial oil threatened the oil industry of Central California with sharp cutbacks and closures. Sen. Diane Feinstein (D-Calif.) properly protested and the White House granted another exemption.

So now the Administration is backing away from the BTU tax and a 7-cent to 8-cent a gallon gasoline tax seems inevitable.

But before the debate is over, you may see proposals to Congress for a fee on oil imports to raise money for the deficit. One argument for import fees, say the idea’s backers, is that in a time of declining oil prices, foreign producers may not be able to pass on the whole amount to U.S. consumers. We’d get deficit reduction on the cheap.

And the unspoken argument is that U.S. producers may want protection against cheap foreign oil. At last week’s meeting of the Organization of Petroleum Exporting Countries, Kuwait rejected a quota on its production. Kuwait, which has restored its war-damaged wells, wants to sell 400,000 extra barrels per day onto world markets.

Those markets are already awash. There are 500,000 extra barrels a day coming out of Russia, reports Albert J. Anton Jr., a partner at Carl H. Pforzheimer & Co., an investment firm specializing in oil. Other reports, from the Middle East, say embargoed Iraqi oil is leaking onto world markets through Iran.

As a result, oil prices may fall sharply. “There could be a scare on the downside,” says Anton. We think of cheap oil as always in our interest, but a collapse of prices in 1986 was devastating for large sections of the country, particularly the Southwest.

Otherwise the U.S. energy picture is mixed. On the good side, usage of natural gas has been growing; it now provides more than 25% of all U.S. energy. Also, natural gas prices have risen from years of depression so producing companies are thinking again about drilling for new deposits.

Still, the great bulk of U.S. oil investment lately--$20 billion worth--has been outside the country. And that migration of capital has left more than 400,000 U.S. oil workers jobless.

Such joblessness explains some of the bitterness that greeted the Administration’s energy tax. Clinton blamed his troubles on “big oil lobbies,” but the real source of difficulty was sloppy thinking at the White House.

Yes, but is there a better way? Isn’t the White House right to push environmental goals and try to reduce the budget deficit? Sure, but the best idea is not to use the tax system to achieve such goals.

“Selective taxes are a bad thing,” says Lawrence Stone, a tax expert in the Lyndon Johnson Administration who is now at Irell & Manella, a Los Angeles law firm. “Taxes are best when they’re neutral.”

But energy taxes seldom are neutral because one region or another suffers. The spacious West is hurt by gasoline taxes, frigid New England gets hit by import fees on Venezuelan heating oil.

The key is to do things directly. To lift environmental standards, support research into cleaner fuels and use the stick of higher standards on chemicals and emissions to force progress on industry.

To encourage cleaner energy, trust markets--up to a point. Because it is so important to all business, energy has never been subject totally to free markets. Oil and gas prices have been administered by the U.S. government, or OPEC or some other body. But in the last 20 years, energy markets have been free enough to create an abundance of clean natural gas in the United States and a glut of cheap oil internationally.

Finally, the best way to reduce the budget deficit is to get the economy moving. To his credit, Clinton may have recognized the need to sacrifice the energy tax in pursuit of his larger economic program. If the economy picks up, people will soon forget the fiasco of Clinton’s energy tax.