Energy tax would siphon U.S. growth - Column

0 Comments | Insight on the News, Feb 22, 1993 | by Bruce Bartlett

There is something about Democrats that compels them, as soon as they get into the White House, to suddenly start talking about increasing taxes on energy.

One of Jimmy Carter's first proposals in 1977, for example, was something known as the crude oil equalization tax, which would have imposed an excise tax on domestic petroleum equal to the difference between domestic prices, which were then under federal price control, and the much higher world prices. This proposal was widely viewed as a stupid idea and it failed to achieve support in the Senate, even though that body was under Democratic control.

Now Bill Clinton is retracing Carter's footsteps with a proposal for a broad-based energy tax. Although the form of such a tax is unknown, the underlying principle seems to be that energy in the United States is undertaxed. A simple examination of the facts, however, suggests otherwise. The energy industry and energy in general are among the most heavily taxed things in the United States.

Consider gasoline taxes. The federal government imposes a tax of 14 cents on each gallon of gasoline consumed. On top of this, every state imposes additional gasoline taxes, averaging 18 cents per gallon, with many local governments imposing further taxes. Combined, this amounts to a gasoline tax of about 32 cents per gallon, or roughly 25 percent of the price. By contrast, the general sales tax in every state is below the tax on gasoline, sometimes substantially so. Connecticut, for example, has a 25-cent tax on gasoline, but only a 6 percent general sales tax.

However, well before gasoline reaches the pump, numerous other taxes have already been imposed and are included in the price. For starters, there are federal and state income taxes. In addition, every oil-exporting country and every oil-producing state imposes some form of direct tax on oil production. In 1989, U.S. petroleum companies paid an average effective tax rate of 34 percent on their domestic petroleum operations and 51.7 percent on their foreign petroleum operations, for a combined rate of 42.8 percent. This substantially exceeds the average tax rate on nonpetroleum companies. In 1989, the largest U.S. oil companies paid an average tax rate on their total operations of 39.6 percent, compared with 35.8 percent for the Standard & Poor's 400 companies.

Special taxes, such as the windfall profits tax and state severance taxes, increase the effective tax rates on gasoline still more. In recent years, the windfall profits tax and state severance taxes have increased the effective tax rate on petroleum by 10 to 20 percentage points. (See the Department of Energy report "Average Effective Corporate Income Tax Rates for Petroleum Operations, 1977-1989" for details.)

Other forms of energy are heavily taxed as well. There are federal, state and local taxes on coal production and numerous state and local taxes on electricity and natural gas, as well as on just about every other form of energy, including aviation fuel.

Still, it is true that Americans tend to pay less for energy than people in other industrialized countries. Of course, just because some other country is doing something foolish is no reason to imitate it. But more important, any effort to raise energy prices will certainly have negative effects on the economy. A 1983 study by Data Resources Inc., for example, found that a 10 percent energy surtax would reduce real gross national product growth by about half a percentage point per year and initially raise the Consumer Price Index by almost a full percentage point. Slower growth and higher inflation reduce other federal revenues and raise government spending. Consequently, the federal government would net only 48 cents out of every dollar of increased energy taxes. State and local governments would lose another 10 cents per dollar.

Higher energy prices also will undermine U.S. competitiveness. As a recent report from the congressional Joint Committee on Taxation points out: "The price at which energy can be obtained will influence the degree to which a nation's economy is competitive in the production of energy-intensive goods." Therefore, any policy that raises the cost of energy will necessarily undermine U.S. competitiveness.

In conclusion, it does not appear that the energy industry is undertaxed. Moreover, the impact of a large energy tax would be quite negative on both growth and competitiveness. As a result, such a tax would not raise the target revenue.

Such was also the case with the windfall profits tax, which the Carter administration came up with after the failure of the crude oil equalization tax. The tax was supposed to raise more than $40 billion a year when fully effective. Only a fraction of that was raised, however, because of declining prices for oil resulting from declining consumption and higher production. By 1988 the tax was raising no revenue at all, and it was repealed.

Bruce Bartlett was, until recently, a deputy assistant secretary at the Treasury Department.