Adopting an energy tax would be a major change in our tax system. We shouldn’t do it casually. By itself, the Clinton tax is modest. Overall energy prices would rise about 3 to 8 percent after a three-year phase-in. But once enacted, this tax would probably go in only one direction: up. It would have to be at least doubled or tripled to have a big impact on energy use. And pressures for higher taxes to cut the budget deficits would be unrelenting. Do we really want an energy tax as our next big tax?
As I said, my view is yes. Energy use imposes social costs like greenhouse gases, not reflected in market prices. I also think that investments in energy efficiency would ultimately save businesses and consumers money. But there’s a legitimate debate here. An alternative to an energy tax is a value-added tax (VAT), which resembles a national sales tax. Companies would pay a tax as a share of the value of their own production. Most of the tax would be passed along to consumers in higher prices. Many economists argue a VAT would encourage more consumer saving (people wouldn’t pay any VAT on money they save).
Congress should critically examine these rival proposals. The Clinton tax is imposed on British Thermal Units: a BTU is the amount of energy needed to raise one pound of water one degree. After the phase-in, the BTU tax would increase the price of oil by $3.50 a barrel, or about 18 percent of today’s price. A ton of coal would increase $5.60, a 26 percent jump. A thousand cubic feet of natural gas would rise about 13 percent. But the price increases to consumers would be smaller, because fuel costs account for only a part of final energy prices. The administration figures the final increases as follows: 5 percent for gasoline (7.5 cents a gallon); 3 percent for electricity; 4 percent for residential natural gas, and 8 percent for home heating oil.
Because the tax increase is so mild, both the claims for it and objections to it are exaggerated. Yes, it would depress oil imports-but not by much. In 1991, imports totaled 6.6 million barrels a day, or 40 percent of our oil use. By the year 2000, the Department of Energy estimates imports will rise to 10.8 million barrels daily, or 56 percent of consumption. Against that, the administration says the tax might cut imports by 3 percent (350,000 barrels daily). The Congressional Budget Office (CBO) puts savings at half that. Indeed, no tax could end our dependence on imports. We simply don’t produce enough oil to meet our needs. Likewise, the tax wouldn’t reduce pollution or greenhouse gases because it doesn’t cut overall energy use. Economic and population growth will raise energy consumption an estimated 15 percent in the 1990s; the tax might shave the total by 2 percent, says the administration.
If the energy tax isn’t stiff enough to do much good, neither can it do much harm. The wails of manufacturers that it may make them uncompetitive are overblown. On average, energy accounts for about 4 to 6 percent of manufacturing costs. At most, the Clinton plan might raise that by 0.5 percentage points. Such tiny changes are overwhelmed by slight shifts in exchange rates (which make U.S. products more or less expensive on world markets). But the same might not be true of a much higher tax. The CBO has estimated how big a tax would be required to stabilize emissions of carbon dioxide, the main greenhouse gas and a byproduct of fossil fuels. Compared to the Clinton proposal, the overall tax would have to be twice as high and the tax on coal three times as high. Other estimates indicate even higher taxes would be needed.
At that point, a VAT might be appealing. A 5 percent VAT might raise about $125 billion annually. A VAT could be used both to increase revenue and to reduce the income tax. Income-tax rates could be cut, and some of the system’s complexity could be eliminated. Former Treasury Secretary Nicholas Brady proposed such a plan; the harsh impact of a VAT on low-income families would be offset by exempting more of them from the income tax. Finally, a VAT would not penalize energy-intensive sectors like manufacturing. A stiff energy tax could cause industries that use huge amounts of energy (paper, aluminum, oil refining) to locate new plants elsewhere.
My reservations about a VAT are many. In practice, it could be riddled with exceptions. Congress might try to distinguish between luxuries and necessities. A hopelessly complex tax could become a honeypot for lobbyists, lawyers and accountants. The CBO estimates that a VAT similar to those in Europe would involve compliance costs of $5 billion to $8 billion annually. But the VAT’s biggest defect would be its invisibility. Because the tax would be absorbed in everyday prices, it would fade into the background. Big taxes should not be unobtrusive. People should feel the taxes they pay. Otherwise, taxes don’t discipline government spending. I also doubt that a VAT would much increase saving; economists routinely exaggerate the power of taxes to change behavior.
Perhaps Clinton ultimately wants both a VAT and an energy tax. But for now, he’s simply trying to stampede his program through Congress. He envisions a one-time spasm of deficit reduction. By fall, all the political dirty work would be done. This means that Congress won’t consider the full implications of an energy tax or compare it to a VAT. It also means accepting a Clinton package that has too many taxes and too few spending cuts.
These problems have a solution. Congress should separate the energy tax from the Clinton package and deliver a firm message: we won’t pass this tax-or its equivalent-until you propose more spending cuts. This would give Congress more time to evaluate the energy tax and put more pressure on the White House to cut spending. Unfortunately, Congress shows no interest in asserting itself. It prefers to be stampeded.
