Federal Budget Issue: Do We Need an Energy Tax?

Policy Backgrounders | Taxes

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

The Energy Tax: Who Pays?

Figure I - Clinton Administration Estimate of the Cost of the Energy Tax Per Family

One of the main issues of contention over the energy tax is whether the burden would be spread fairly.

"Even the Treasury Department says the cost per family would be twice the adminis-tration's estimate."

The Burden for Middle-Income Families. Bill Clinton ran for president pledging not to raise taxes on the middle class. Although the energy tax clearly violates this campaign promise, during his State of the Union address President Clinton assured Americans that the energy tax would cost the typical middle-income family just $17 per month - or $204 per year. This estimate is highly suspect, however, because all other forecasts - including government forecasts - say that the burden on middle-income families would be much higher. [See Figure I.]

  • Clinton's own Energy Department estimates the cost per family to be $322 annually - 50 percent higher than the White House estimate.4
  • In May, Clinton's Treasury Department revised its estimate upward to nearly $400 per year.5
  • The nonpartisan Tax Foundation places the per-family cost at roughly $450 annually - or more than twice as high as the White House alleges.6
  • Former Carter administration Energy Secretary James Schlesinger calculates that the tax would cost the average American family up to $500 per year - 150 percent higher than the White House estimate.7

Even though the President's $17-a-month figure has been repeatedly discredited by independent energy analysts and administration economists, President Clinton and Treasury Secretary Lloyd Bentsen continue to use it.

Different Burdens for Different Regions of the Country. The actual impact on particular families would depend on where they live, how much energy they use in the home, what types of products they buy and how much driving they do. Contrary to the administration's claim that the energy tax hits all regions of the country equally, energy usage and production vary widely by state. Even if the tax applied to energy uniformly, the tax incidence would be much higher for residents of some states than others. The fact that different tax rates are applied to different types of energy makes the impact even less fair.8 For example, one particularly arbitrary feature of the tax is that oil (except for exempted home heating oil) would be taxed at more than twice the rate of other energy forms. Table I shows that burdens for families would vary widely across the country. For example:9

Table I - Ten States Where the Energy Tax Burden Is Highest
  • A family of four living in Louisiana or Wyoming would pay more than $900 in new taxes.
  • A family living in Alaska could expect to pay more than $1,100.
  • By contrast, the cost for a family in Rhode Island would be only $213.

"The cost per family varies by a factor of almost six to one from state to state."

Higher Burdens for Low-Income Families. The Clinton administration argues that low-income families would not be made worse off because of the energy tax. The truth is that an energy tax is among the most regressive of all possible taxes. [See Figure II.] According to DRI/McGraw Hill:10

  • Middle-income households spend about 9 percent of their income on energy-related items.
  • Individuals in the lowest quintile in income spend 23 percent of their earnings on energy.
  • The wealthiest fifth spend only 4 percent of their income on energy.

"An energy tax is among the most regressive of all taxes."

Still, President Clinton claims that no family with an income under $30,000 would pay more taxes because he also proposes to expand the Earned Income Tax Credit (EITC),11 food stamps and the Low-Income Home Energy Assistance Program. However, there are several errors in the administration's calculations:

Figure II - BTU Tax as a Percent of Family Income
  • In arguing that no family earning less than $30,000 would be worse off, the Clinton administration relies on an unusual method of calculating family income - one that includes fringe benefits, the imputed rental value of a home and other such sources of nonmonetary income.
  • When normal taxable money income figures are used, it turns out that the average family with $25,000 of income per year would incur a net tax increase under the Clinton plan.12
  • Although the EITC is the main offset to the energy tax for low-income earners, there are 18 million single, childless taxpayers who have incomes between $10,000 and $25,000 and who are ineligible for the EITC.13
  • Although the administration proposes to increase government subsidies for low-income families by the average amount of the BTU tax they would pay, roughly half of the low-income families would have energy tax liabilities that are above the average.

Hence, for millions of poor families, a higher EITC and higher welfare benefits would not fully compensate for higher energy taxes.

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