Federal Budget Issue: Do We Need an Energy Tax?

Policy Backgrounders | Taxes

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


The Economic Impact of the Energy Tax

Table II - The Energy Tax and the Family Budget

"Millions of poor families would be worse off because of the energy tax."

The Clinton energy tax is largely a hidden tax. That is, the tax would not show up as a separate item when goods were purchased. Rather, it would be embedded in the production cost of the goods and services we buy. This is quite deliberate. White House officials have admitted that one reason the administration opted for a BTU tax is that it is less conspicuous than a gas tax. And they have resisted, in some cases unsuccessfully, moving the tax collection point closer to the final consumer.

Although the energy tax may be hidden, its economic impact surely would be considerable. An energy tax entails a simultaneous double shock to American workers - through output and prices.14 And certain industries would be especially hard hit. The following analysis is a brief summary.

Lower Output of Goods and Services. The energy tax would raise production costs. Because there would be no corresponding rise in income levels, producers would find it impossible to pass on the total cost to consumers by simply raising prices. Thus some of the cost of the tax would be in reduced output and increased unemployment. This effect is discussed in greater detail below.

Higher Prices. Some of the increased cost of production would be paid directly by consumers through higher gas prices, heating costs and electric utility bills. Consumers would also pay indirectly for the energy tax at the supermarket, the drug store and the shopping mall. White House economic adviser Robert Rubin conceded as much when he said, "The notion is [that] this BTU tax would get passed on to consumers."15 How much would prices rise at the checkout counter as a result of the energy tax? A DRI/McGraw Hill study concludes that:16

  • The average increase in the inflation rate resulting from the energy tax would be 0.5 percentage points.
  • This is equivalent to an annual pay cut or loss of purchasing power of about $225 a year for a family with an income of $45,000.

For energy-intensive items, prices are expected to rise by substantially more than 0.5 percentage points:

  • A 1993 survey by the National Association of Manufacturers found that U.S. manufacturers expect the BTU tax to raise production costs by 4.8 percent on average.17
  • If we assume that only half of the cost increase is reflected in higher prices, then the price of energy-intensive manufactured products would rise by 2.4 percent.
Table III - Largest Job Losses Due to a BTU Tax

"The energy tax is roughly equal to an 8-to-10 cent per gallon increase in gasoline prices."

Effects on Family Budgets.18 Even though producers cannot pass on all of the cost of the BTU tax, consumers can expect across-the-board price increases. For direct energy purchases, the increased cost to consumers is fairly easy to calculate. The energy tax is roughly the equivalent to an 8-to-10-cent per gallon increase in gasoline prices at the pump.19 This would be the most dramatic increase in gas prices since the breakup of the OPEC oil cartel.

  • The typical driver would pay roughly $1.20 more for each fill up (assuming 14 gallons purchased), courtesy of the energy tax.
  • Adding in the $4.48 in state and federal gas taxes that drivers currently pay, on the average, the total tax on a tank of gas would be $5.68.

Edison Electric Institute estimates that the Clinton tax would mean a 3-to-4 percent increase in monthly electric bills, with especially heavy burdens in the colder climates of the North and East.20 Thus:

  • The BTU tax would add roughly $27.60 per year to utility expenses of the average homeowner.
  • The tax would cost New York, Pennsylvania and Ohio $1 billion per year each.

According to the Food Marketing Institute, the average family spends $80 per week on groceries. With the energy tax, the average family grocery bill would rise by almost $100 per year. Table II shows the impact on individual items.21

"The tax would add $100 a year to the average family's grocery bill."

Effects on American Competitiveness. The BTU tax could weaken the international competitiveness of major U.S. industries. Currently, low energy costs are a primary advantage for U.S. manufacturers competing with Japanese, Korean and European industries. Low energy costs help U.S. industry keep production costs low. Proponents of the energy tax contend that U.S. industry would not be hurt by the energy tax, because energy costs would still be lower in the United States than in competitor nations. However, unlike the Clinton proposal, Japan and most European nations exempt industrial fuel from their energy taxes.22

The administration recently conceded that the energy tax would place U.S. industry at a potential competitive disadvantage and proposed that foreign goods imported to the U.S. with at least a 2 percent energy content pay a new border tax. Its purpose is to impose roughly the same energy tax on imports as on U.S. products. However, because the tax on U.S. goods is not rebated at the border, the energy tax would raise the cost of U.S. exports of computers, pharmaceuticals, industrial equipment and other goods. Hence, the energy tax would almost certainly exacerbate America's trade deficit. The industries that would be especially hard-hit by the energy tax include transportation, utilities, agriculture, chemicals, steel, aluminum, paper and lumber.23

"The energy tax is expected to cost farmers $1 billion per year."

Effects on Farmers. One reason why consumers would see higher food prices from the BTU tax is that agriculture is one of America's most energy-intensive industries. Farmers are heavy users of gasoline, diesel and other fuels for operating tractors, trucks and other farm equipment; fertilizing and irrigating use energy; lighting and heating use electricity.24 The total Clinton energy tax is expected to cost American farmers roughly $1 billion per year.25 Small and medium-sized farms, which already operate with narrow profit margins, would face huge new tax liabilities under the BTU tax. According to the American Farm Bureau, if the energy tax is approved:26

  • A 500-acre Illinois corn farmer would see costs rise by $670 per year.
  • A 400-acre rice farmer in California would pay $996 in direct and indirect costs due to the BTU tax.
  • A 2,100-acre Kansas crop farm would see costs leap upward by $1,513.
  • An average-size greenhouse/nursery in New Jersey would pay $1,469 in BTU tax.
  • A 1,300-acre cotton/wheat farm in Texas would face a new tax liability of $2,650.

Effects on the Auto Industry. Two industries that have faced especially difficult financial times in recent years are airlines and automobiles. The Clinton energy tax would almost entirely nullify the gains from their painful but necessary restructuring. Consider the effects on General Motors:27

  • General Motors estimates that the Clinton energy tax plan would add $68 million in direct production costs to its U.S. operations.
  • GM estimates the indirect costs to be an additional $270 to $340 million per year.
  • Thus the energy tax would impose $300 to $400 million more in taxes and related costs on a firm that lost $1.5 billion in 1992.

Effects on the Airline Industry. For U.S. airlines the story is similar. At a time when Congress and the Clinton administration have appointed a blue-ribbon commission to address the industry's ills, an energy tax would certainly add to them.

  • The energy tax would add $950 million to $1.2 billion to the costs of operating airlines.28
  • In the past three years, this industry has lost $6 billion and more than 10,000 jobs, and two major U.S. airlines are in Chapter 11 bankruptcy.29

Airline travelers would also feel the impact. The average cost of jet fuel is expected to rise by 8 to 10 cents per gallon - or up to 15 percent. The Air Transport Association estimates that this would add 2.7 percent to the cost of the average flight.30 Assuming this cost is passed on to the consumer, the ticket price for a cross-country flight from New York to San Diego would rise by about $10 per passenger. This is in addition to a 10 percent ticket tax the traveler pays under current law. The total tax on the flight would rise to nearly $50 per passenger.

"The BTU tax would destroy about half a million jobs and reduce the GDP by up to $50 billion."

Effects on Jobs. As the auto and airline industries illustrate, the energy tax would impose substantial new costs on American manufacturers. For many industries, the BTU tax would almost certainly require layoffs as well as delays or cancellations of planned plant expansions and new hiring - and it would lower profits. Several studies that attempted to quantify the job loss and economic growth reduction from the BTU tax have arrived at remarkably similar estimates.

  • The well-respected Institute for Research on the Economics of Taxation projects that Clinton's energy taxes alone would cost the economy 500,000 jobs and $50 billion in lost output when fully implemented.31
  • The National Association of Manufacturers estimates a loss of $38 billion in output and 610,000 jobs by 1998.32
  • The American Petroleum Institute finds that the BTU tax over five years would reduce total GDP by $170 billion and reduce employment by 1998 by 600,000 jobs. The GDP loss is the equivalent of a loss of about $1,500 per household through 1998.33
  • The independent economic forecasters at DRI/McGraw Hill estimate a net loss of 400,000 jobs by 1998 from the energy tax.34

The consensus of all this research is that the BTU tax would destroy about half a million jobs and reduce the GDP by up to $50 billion. Just as the BTU tax burden would be higher in some states than in others, job losses would be greater in states with energy-intensive industries. The Tax Foundation estimates of the largest job losses are shown in Table III.35


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