Tax Analysts Blog

Obama's Oil Barrel Tax Would Be Extremely Regressive

Posted on Feb 17, 2016

There isn't much new in President Obama's final budget proposal. The budget features 115 tax provisions from last year's plan, and many of the 30 new provisions are simple tweaks to old proposals (mostly having to do with the extenders package passed by Congress). There is, however, one new tax that has generated quite a bit of interest, at least as a talking point. Obama has proposed a $10 tax (or fee administered like a tax) on barrels of oil, ostensibly to pay for infrastructure and climate change needs.

It's fitting that in such a stale set of proposals from a disappointing left-of-center president, the one big new idea would be extremely regressive. Obama officials have argued that is not clear whether oil companies would pass the tax on to customers or pay it themselves. That's a strange thing to say, considering that it's pretty obvious that prices at the pump would rise if the tax ever went into effect. Obama even justified the tax by pointing to current low per-gallon gas prices. And the $10 tax would be phased in over five years. The phase-in period is almost certainly an attempt to ease the burden on gas consumers (the president has no interest in easing the burden on fossil fuel companies -- the one constant in his energy policy has been an attempt to impose more taxes on the oil and gas industry).

Some experts have said that a $10 fee on oil would work out to about a 25-cent increase per gallon. That's 15 cents higher than South Carolina Republican Rep. Tom Rice's 2015 bill would have raised taxes to save the Highway Trust Fund. It would be more than double the current federal gas tax (18.4 cents per gallon)Obama's plan would be a major change in how U.S. taxpayers pay for infrastructure.

Gas taxes are consumption taxes, and like most consumption taxes they are extremely regressive: They have a higher impact on lower-income taxpayers. Some have argued that they are fees for using roads, and that is the original justification for the tax. But the increasing use of hybrid vehicles and a general improvement in vehicle miles traveled per gallon has broken that linkage. Gas taxes haven't been able to fund the Highway Trust Fund for years. And despite pushes by Democrats and Rice for a higher tax, Congress hasn't seriously considered raising the tax in decades.

So why is a Democratic president pushing for a regressive tax increase in his swan song budget? Perhaps it's because he thinks he can make it sound like a tax on the oil industry, a group that isn't all that popular with core Democratic voters. Or maybe Obama really believes we need a higher gas tax, and he thinks he can cloak it in the form of a barrel fee to make it acceptable to skeptical lawmakers.
Regressive consumption taxes are very popular in countries dominated by the left. These types of levies make it easy to raise vast amounts of money by taxing easy-to-target lower-and middle-income taxpayers (who can't shift money into low-tax jurisdictions or take advantage of favorable timing and character categorizations). The United States has largely avoided using them. And it should continue to do so. Lawmakers should be looking for ways to protect the U.S. corporate tax base or extract revenues in a progressive manner. They shouldn't be trying to find clever ways to disguise a simple gas tax increase during a probably fleeting time of low gas prices.

 

Read Comments (1)

AMTbuffFeb 18, 2016

California's gasoline prices are dramatically higher than in other states,
mostly because the state legislature loves saving the planet and raising
revenue more than they love poor people.

Submit comment

Tax Analysts reserves the right to approve or reject any comments received here. Only comments of a substantive nature will be posted online.

By submitting this form, you accept our privacy policy.

* REQUIRED FIELD

All views expressed on these blogs are those of their individual authors and do not necessarily represent the views of Tax Analysts. Further, Tax Analysts makes no representation concerning the views expressed and does not guarantee the source, originality, accuracy, completeness or reliability of any statement, fact, information, data, finding, interpretation, or opinion presented. Tax Analysts particularly makes no representation concerning anything found on external links connected to this site.