What Will an Energy Tax Do? Raise Prices and Slow Growth, but Little Else

January 01, 1999  ·  Michael Fumento  ·  Investor’s Business Daily  ·  Economy

Environmentalists are delighted with President Clinton’s plan to help close the deficit gap with a tax on energy.

But critics say it would be better to call it an anti-energy tax, that few tax plans could be more precisely tailored to sap the strength of a recovering economy.

"This hurts practically everybody," said Kent Jeffreys, environmental director for the Competitive Enterprise Institute (CEI), a Washington-based free-enterprise think tank. "The only bloc behind this tax is the environmental groups."

While a few environmentalists have hinted they would rather see a carbon-based tax or that they wish the tax had been even bigger, those groups quickly lined up behind the proposal.

The Natural Resources Defense Council, the Environmental Defense Fund, Defenders of Wildlife, Friends of the Earth, National Audubon Society and others pledged their support.

"What’s wrong with my Thermal Unit, baby? Oh, do behave!"

Reid Wilson, political director of the Sierra Club, urged members to call and write their congressmen to "fight back" against various interests that would "spend huge sums of money to kill the Clinton-Gore proposal."

The tax, to be phased in over four years, would impose a basic rate of 25.7 cents per million British thermal units, or BTUs, on coal, natural gas, nuclear fuel, hydroelectric, and alcohol fuels.

An extra tax on oil would bring it up to 59.9 cents. A BTU is a measurement of the heat content of energy.

According to administration officials, the tax will add about 17% to the current price of oil, 15% to the price of coal and 11% to gas over the next three years.

The U.S. Council for Energy Awareness in Washington, D.C., which supports nuclear power, has estimated that the price of nuclear energy will go up about 4%.

Energy produced through windmill or solar technology would be exempt.

The White House originally claimed the tax would cost a typical household about $10 a month, a nice round number that the media and environmentalist supporters of the tax quick latched onto.

But simple mathematics shows the figures being touted by both Clinton and his environmentalist supporters aren’t correct.

The original administration estimate was that the tax would cost $22.1 billion a year after it was fully implemented. That works out to about $88 per American, or $352 per family of four—three times what the Administration said it would cost us.

Yet even this figure may be too low.

The American Petroleum Institute has calculated that the BTU tax actually would amount to about $33 billion, with more than $21 billion on oil alone.

This prompted the administration to raise its estimate to $29 billion, although the Treasury Department said that conservation measures and initial reductions in economic growth as result of the tax itself could reduce revenues to $22 billion.

It is true that in terms of direct energy costs — essentially gasoline and utilities — the cost per household will be only a little over $10. But, like an iceberg, most of the tax will be hidden in costs passed on to consumers.

Said John Shanahan, an economist at the Heritage Foundation in Washington, D.C., "Washing machine prices will go up, vacations will be more expensive, even the cost of a baby rattle will go up."

Corn Costs

Consider the cost of a can of corn.

First, the farmer uses fuel for machinery to plow and till his fields. Production of the fertilizers he uses has consumed large quantities of energy. More energy goes to power equipment used to harvest and dry the crop.

The corn is then trucked to a cannery, using more fuel, and the corn is put in steel cans. Steelmaking is highly energy intensive. From there, the cans are placed on trucks or trains, which use more energy to ship the corn to market.

Conservation is for something that’s running out. There’s a glut of energy sources.

"It’s hidden inside the price," said Shanahan. "No one will ever have a breakout on the tax. They’ll just be complaining about inflation."

Polls show that public support for the tax increase is based on the perception of a much lower tax, the $10 or so of direct costs. That throws into doubt the validity of those polls.

Administration officials have conceded that an energy tax hike, like any tax hike, will slow the economy, though they haven’t said by how much.

Stephen Entin, an economist at the Institute for Research on the Economics of Taxation in Washington has calculated the tax would cause "perhaps a full percent of GNP loss. Perhaps 700,000 jobs would be lost from full BTU tax."

Economist Gordon Richards of the National Association of Manufacturers (NAM) estimates that by 1999 gross domestic product, currently just over $6 trillion, would be $38 billion lower than without the BTU tax and 600,000 jobs would be lost.

Other projections by economists and consulting firms such as DRI/McGraw-Hill in Cambridge, Mass., have calculated losses to the economy of $25 billion to $40 billion.

Said Entin, "It raises the cost of operating every business and household in the country and the result will be less production and less hiring. This won’t help the economy grow. It can’t."

Less-Taxing Alternatives

Whatever the cost, there are revenue raisers that would have been less taxing on the economy.

A study by economist Lawrence Goulder of Stanford University found that the negative economic impact of a BTU tax would be about twice as great as an equivalent boost in income taxes.

"A BTU tax has a narrower base than an income tax and this tends to create larger economic distortions," explained Goulder.

"It’s one of the most inefficient ways of collecting revenues," added NAM’s Gordon Richards.

"There’s nothing like $2 billion in higher operating costs to revitalize a depressed industry."

While the impact of the BTU tax will be spread fairly evenly around the country, certain industries will be hit particularly hard. One of these is the struggling airline industry, which Clinton has pledged to help.

"Clinton proposed an energy tax that will raise the cost of jet fuel 15 cents a gallon. There’s nothing like $2 billion in higher operating costs to revitalize a depressed industry," said the normally staid Journal of Commerce, in a sardonic editorial.

"Just a 10-cent increase would cost the industry $1.5 billion," said Chris Chiames, spokesman for the Air Transport Association in Washington. "If we passed those costs on directly, air fares would go up about 3%. But because of weak demand for air travel, we have been unable to pass on our costs to passengers and shippers."

Chiames says that already the industry has lost $10 billion total over the last 3 years, with three major airlines currently in bankruptcy.

Farmers Hit

Farmers, too, will pay heavily.

"Farmers are very dependent on energy and we’re very concerned that the tax will hurt domestic profitability as well as competition overseas," said American Farm Bureau director of governmental relations Robert Nooter.

The Agriculture Department estimates farms used 667 trillion BTUs’ worth of fertilizer in 1991 and 115 trillion worth of pesticides in 1989. More than 32 million BTU go into making a ton of fertilizer, according to the department.

As an example, Nooter says the Farm Bureau has calculated that an individual farmer producing about 400 acres of corn in the Midwest would incur an additional $1,600 in taxes.

"More than almost any other industry, we have a hard time in passing along costs of production," Nooter said. "Farmers are price takers in the market place, unlike a retailer. This new tax will come first and foremost out of their profit margin — if they have one — and that is very disturbing."

Part of the idea behind the BTU tax is supposedly to channel market forces toward goals the administration finds desirable.

Favoring Gas

Clinton says the tax would be good for domestic natural gas producers. The producers disagree.

For example, Vice President Al Gore said the tax was designed to favor natural gas, most of which is produced in this country, while discriminating against oil, about half of which is imported.

"That’s good for our country," he said.

But natural gas producers don’t share his enthusiasm.

"This is not what this industry needs," said Charlotte LeGates, a spokeswoman for the Natural Gas Supply Association. "In addition to having their regular corporate taxes go up, they’re going to have an energy tax to deal with, which is going to affect their ability to explore for new reserves."

"It will end up weakening the industry from many standpoints," said Judy Leon, vice president of communication for the Independent Petroleum Association of America, whose members produce 60% of the nation’s natural gas.

Said Leon, "We’ve lost 450,000 jobs in last 10 years, more than auto workers and steel workers combined. This really has a potential to hurt us in a big way and to hurt the country."

She added that much of the impact will depend on exactly at what stage gas is taxed. As it now stands, producers will have tremendous difficulty passing higher prices on to users. Leon and other gas producers, however, are hopeful this will change during the lengthy consideration process.

In other comments, Gore told Cable News Network, "The energy tax ... reduces pollution, promotes energy efficiency, and helps us become more independent from foreign oil." He told reporters at a breakfast meeting that the tax "falls way disproportionately on the market for imported oil."

Industry Disagrees

But the industry disagrees with him.

The tax itself doesn’t differentiate between foreign or domestic firms, and the economics of the market are such that domestic producers are certain to be hurt more.

Said Scott Anderson, general counsel of Texas Independent Producers and Royalty Owners Association in Austin, "This tax will do very little to pull us away from imported oil."

"To put an ’equal’ tax treatment on domestic and foreign production has a much harsher impact on the economics of domestic drilling because our profit margin is already so much thinner," said Anderson.

"This tax raises the specter of an additional three and a half dollars per barrel coming out of our pockets," said Anderson. "To take that kind of a hit when so many drillers are already operating on a razor’s edge will inevitably accelerate the premature abandonment of many wells."

What, then, is the purpose of a BTU tax?

Laura D’Andrea Tyson, chairwoman of the president’s Council of Economic Advisers, seems to have contributed to Kent Jeffreys’ suspicions that the purpose of the tax is not economic but environmental. She told Congress that it was intended "not primarily as a revenue-raiser, but primarily as conservation measure."

Awash In Cheap Energy

Yet, Jeffreys notes, "We are a nation awash in cheap, plentiful energy."

Indeed, while Americans spent over 27% of their GNP on energy in 1950, that figure has dropped steadily since the early 1970s. Now we spend less than 20% of the GNP.

"Conservation is supposed to be what you do with something in short supply," said Jeffreys. "Sapping the economy in the name of energy conservation is like telling Californians whose reservoirs are overflowing and whose houses are sliding down hillsides that they need to take shorter showers and put larger bricks in their toilets."

"It’s utterly absurd," added Dixy Lee Ray, a former governor of Washington and former head of the Atomic Energy Commission. "There is no lack of energy and there is no reason we shouldn’t be using more. The economy would be healthier."

Ray, author of the forthcoming book Environmental Overkill, said, "Energy is the backbone of western civilization. Inevitably, energy and progress are tied closely together.

"Of course," she continued, "A lot of people don’t believe in progress."

Ray says that a strong streak of environmentalism opposes energy for its own sake, completely independent of pollution concerns.

Minor Changes

As to the environment, the changes will be small.

According to Environmental Protection Agency projections, industrial emissions of nitrogen oxides — a key component of smog and acid rain — will decline only 0.8%, while vehicle emissions of hydrocarbons and carbon monoxide will fall a mere 0.25%.

It would have a slight effect on carbon dioxide emissions, which some theories claim will cause the Earth to warm up, the EPA says. But U.S. emissions of carbon dioxide already have leveled off.

"There is some benefit in reduced air pollution, but there are other ways we can reduce air pollution far more and at less cost," Heritage’s Shanahan said.

Said CEI’s Jeffreys, "This tax is incredibly stupid. It won’t help consumers, it won’t help the environment, and it won’t be used to cut the deficit."

But Carl Pope, executive director of the Sierra Club, disagrees. "The upcoming war over this green economic package is the first — and perhaps most important — environmental battle of the Clinton and Gore administration," he said.