The People of America's Oil and Natural Gas Indusry

The Oil Tax Proposal and Household Impacts

Mark Green

Mark Green
Posted February 16, 2016

The president’s $10 per barrel oil tax proposal has been out for about a week now, and the analysis from a number of experts – both in terms of politics and economics – could be boiled down to the social media acronym “smh,” which stands for “shaking my head.”

Political analysis first: “The president perennially proposes repealing the oil industry tax credits which Congress annually ignores,” Benjamin Salisbury at FBR Capital Markets told Bloomberg. “It seems overwhelmingly likely that this fee meets the same fate.” ClearView Energy Partners’ Kevin Book said there are “near-zero odds that the Republican-led Congress will grant the president’s request.”

Now the economics. Here’s Veronique de Rugy, senior research fellow at George Mason University’s Mercatus Center:

This terrible idea would roll back the tremendous energy gains made in recent years and harm the economy. The biggest and most obvious impact of the Obama gas tax would be its impact on the pocketbooks of American drivers. … It wasn't so long ago that the president at least rhetorically acknowledged the negative impact of higher energy costs, particularly on the poor — for whom transportation and residential energy costs account for a larger share of their household budget.

And the Heritage Foundation’s Nicolas Loris:

Making no mistake, the fee is a 22 cent-per-gallon gas tax, a diesel tax, a home heating oil tax, a jet fuel tax, and a plastic tax (petroleum liquids), among other things. The costs will be passed down to consumers in the form of higher energy prices, disproportionately impacting low-income families that spend a higher portion of their budget on energy costs.

At its base, the oil tax proposal would hurt lower-income Americans – to pay for government spending on ideas best described as “boondoggles” that would be of little benefit to the average U.S. worker. Let’s look at the proposal’s regressive impacts. Economists at API analyzed the effects of taxing fuels at the equivalence of $10-per-barrel (actually $10.25 per barrel, per the administration) and broke down those effects according to household income.

First, the total energy cost increase per household by income group, including additional direct transportation fuel expenditures per year and indirect energy costs in the economy – additional costs for anything that is hauled, shipped or transported because of higher fuel costs:

Cost

We see that based on out-of-pocket expenditures, Americans earning more than $70,000 a year would pay $514.36 more per year if the oil tax proposal went into effect. Americans earning less than $15,000 would pay $144.52 more per year. But now look at the impact of those added costs:

percentage

The cost of the oil tax proposal for Americans earning less than $15,000 a year, as a percentage of income, is more than four times as large as the impact on those earning more than $70,000 a year. Indeed, the chart above presents a clear snapshot of a regressive tax – one whose relative effects are most impactful on those least able to pay. The next most-impacted income group is the $15,000 to $30,000 group, then the $30,000 to $50,000 group and so on. Put simply, if you’re earning less than $15,000 a year, $144.52 is a bigger share of your income than $514.36 is to someone earning more than $70,000 a year.

A second point: While adding $10.25 to the current cost of a barrel of oil might not create much of a ripple with consumers now (again, except at lower income levels), the impacts of an additional $10.25 per barrel could be significant – to consumers and the broader economy – if/when the cost of crude oil increases.

There are a number of good reasons to reject the president’s oil tax. It would be harmful to consumers – especially at lower income levels – and it would be a drag on domestic energy production and the economy.

Meanwhile, if the goal is more revenue for government from energy development, there’s simply more effective ways to go about it. API President and CEO Jack Gerard, writing recently in USA Today:  

There are better ways to raise revenue, without destroying jobs or raising consumer costs. Opening up the Atlantic, Pacific and eastern Gulf of Mexico to energy exploration could contribute $200 billion in government revenue. Removing barriers to energy infrastructure investment would unleash $1.15 trillion in private capital and generate $27.5 billion in average annual revenue — without costing a dime of taxpayer money.

ABOUT THE AUTHOR

Mark Green joined API after a career in newspaper journalism, including 16 years as national editorial writer for The Oklahoman in the paper’s Washington bureau. Mark also was a reporter, copy editor and sports editor. He earned his journalism degree from the University of Oklahoma and master’s in journalism and public affairs from American University. He and his wife Pamela live in Occoquan, Va., where they enjoy their four grandchildren.