Federal Budget Issue: Do We Need an Energy Tax?

Policy Backgrounders | Taxes

No. 127
Friday, June 04, 1993
by Stephen Moore


"The BTU tax would increase the production cost and price of all goods and services."

Bill Clinton's economic program calls for some $295 billion in taxes over the next five years. To put this tax hike in perspective: the adminis-tration's tax proposal is about twice the size of President Bush's tax increase, which was enacted as part of the 1990 budget deal. Roughly one-quarter of the new tax revenues are to come from the introduction of a broad-based energy tax, by far the most controversial element of the economic package. The so-called "BTU tax" is a levy on the heat content of energy1 and would increase the production cost and price of all the goods and services produced in the country. The Treasury Department estimates that the tax would net roughly $22 billion per year by 1998, when it is fully phased in.

Arguments for a BTU Tax. Proponents of the energy tax point to several benefits. They argue that the tax would (1) significantly reduce the budget deficit and therefore lower interest rates and raise investment, (2) reduce America's dependence on foreign oil, (3) benefit the environment by encouraging energy conservation and (4) be fair and affordable for all income groups because the tax on low-income families would be offset by increases in low-income support programs.

Arguments against a BTU Tax. Opponents of the energy tax counter that it would (1) significantly harm the U.S. economy, (2) increase prices and the inflation rate, (3) impose financial hardship on low- and moderate-income families and 4) reduce the budget deficit by very little when all of its economic effects are taken into account.

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