Federal Budget Issue: Do We Need an Energy Tax?
Table of Contents
Would the Energy Tax Reduce the Budget Deficit?
President Clinton has repeatedly maintained that Americans are willing to pay more taxes and make the necessary sacrifices to reduce the $300 billion budget deficit. Even if that is true, the energy tax, which he is touting as a $72 billion deficit reduction measure, would at best cut the deficit by a fraction of that. And it might not reduce the deficit at all. Here's why.42
- Start with $97 billion. This is the amount of gross revenue the administration estimates it would collect from the energy tax over the next five years.
- Subtract $25 billion. The Treasury Department concedes that roughly $25 billion of this revenue would be offset by static reductions in income and payroll taxes.43 This leaves $72 billion for deficit reduction.
- Subtract another $42 billion. The administration plans to increase welfare spending by roughly $42 billion per year as an offset to the new taxes that low-income families would have to pay. This leaves the administration with $30 billion in net deficit reduction. Hence, according to the administration's own analysis, the energy tax would raise $3.50 in taxes for every $1.00 it reduces the deficit.
- Subtract another $5 billion. The administration neglects to take into account the dynamic economic impact of the tax. Independent forecasters have concluded that the energy tax would reduce GDP by at least $140 billion over five years.44 This would reduce tax revenues by roughly $30 billion, $5 billion more than was estimated by the Treasury Department. This cuts the net deficit reduction estimate from $30 billion to $25 billion.
- Subtract another $15 billion. The BTU tax would raise the inflation rate by an estimated 0.5 percentage points. As a result, federal expenditures would rise because programs such as Social Security are indexed to inflation. Hence, the inflationary impact of the energy tax would raise federal entitlement spending by roughly $15 billion over five years.45
"What is touted as a $72 billion deficit reduction measure actually works out to no more than $10 billion."
As Table IV and Figure III show, the amount of deficit reduction is now down to $10 billion - or a scant $2 billion per year. Viewed from the perspective of deficit reduction, the BTU tax (combined with welfare spending offsets) is highly inefficient for two reasons:
- The BTU tax would raise $9.70 of revenue for every dollar that it (allegedly) would reduce the deficit.
- Since the BTU tax would reduce GDP by $35 billion per year in order to reduce the deficit by $2 billion, private output would decline by $17.50 for every dollar of net deficit reduction.