U.S. SENATE DEFICIT BILL SHIFTS FOCUS TO TRANSPORT FUELS TAXES, SPENDING CUTS

Patrick Crow
Washington Editor

Key Senate Democrats have agreed on a federal deficit reduction package that calls for a 4.3cts/gal transportation fuels tax increase along with deeper spending cuts. The fuels tax would apply to gasoline, diesel, and jet fuel.

After days of private meetings, the 11 Democrats on the Senate finance committee agreed on the compromise package, ensuring committee passage. All nine Republicans on the committee are expected to vote against the bill.

Majority leader Sen. George Mitchell (D-Me.) said the full Senate would take up the bill this week.

Democrats hold a 56-44 majority in the Senate, and the Clinton administration will have to lobby Democratic senators hard to win passage.

For that reason, Mitchell took the unusual step of calling a Democratic caucus and briefing senators on details of the compromise before it was disclosed to the public.

The House of Representatives earlier passed a $496 billion deficit reduction bill that includes a controversial BTU tax on all forms of energy production, with a double tax on oil products. It would raise almost $72 billion in 5 years (OGJ, June 7, p. 22).

When it became apparent the Senate would not approve a BTU tax to fuel the Clinton administration's legislation, the president stopped pressing for a BTU tax and took a hands off approach, allowing the senators to find an alternative energy tax.

If the Senate passes the finance committee bill, a conference committee would merge the House and Senate bills in July and send them back to both houses for final approval.

Last week Budget Director Leon Panetta confirmed that when the bills go to conference the Clinton administration plans to press for its BTU tax rather than the energy tax that the Senate passes.

GASOLINE TAX

The Democratic Senators met behind closed doors to seek a compromise, after Sen. David Boren (D-Okla.) blocked the BTU tax in committee.

The senators used as their starting point a proposal by Sen. John Breaux (D-La.) for a 7.3cts/gal gasoline tax increase that would raise about $40 billion in 5 years.

The current federal gasoline tax is 14.1cts/gal and the diesel fuel tax 20.1cts/gal.

Breaux argued an additional transportation tax would be simpler to administer than the BTU tax because the collection framework for the fuel excise tax is in place, except for airlines and railroads.

Sen. Max Baucus (D-Mont.) fought Breaux's proposal, arguing that such a large gasoline tax increase would be unfair to citizens in western states who drive farther and spend more for gasoline.

Mitchell, a arty to the negotiations, said the overall package would reduce the deficit $508 billion in 5 years through $248 billion in tax increases and $260 billion in spending cuts.

The BTU tax would have raised almost $72 billion, while the 4.3cts/gal gasoline tax would raise about $25 billion. The compromise bill would raise another $19 billion from lower Medicare payments to hospitals and doctors, cut the earned income credit for working poor $11 billion more than the House bill, and other measures.

In addition, senators decided to halve relief the House bill would give corporations subject to the alternative minimum tax.

But they also reduced the House bill's tax bite on multinational companies' overseas income.

Sen. Daniel Patrick Moynihan (D-N.Y.), finance committee chairman, said the bill is "the most progressive change in our taxes to take place since the 1940s."

GASOLINE TAX PROBLEMS

Breaux's transportation tax idea immediately came under fire from the trucking and airline industries, currently operating on thin margins.

Trucking groups noted any diesel fuel tax would be in addition to an expected 7cts/gal increase in the price of diesel next October when the 1990 Clean Air Act amendments require use of reduced sulfur diesel.

Transportation Secretary Federico Pena also criticized the Breaux bill, saving higher fuels taxes would be unfair to the ailing transportation industries, particularly the airlines.

White House Press Secretary Dee Dee Myers said Pena was speaking for himself, and the Clinton administration is remaining silent on which energy tax the Senate should adopt.

Although they also use diesel, the nation's railroads are supporting Breaux's transportation fuels tax. Analysts said fuel costs make up about 7.5% of railroads' total operating costs vs. 13% for their main competitors, trucking companies.

Baucus said Breaux's proposal is essentially a transportation tax that only the middle income Americans pay. Essentially that proposal takes the burden of deficit reduction off the backs of corporate America and places it squarely on the backs of senior citizens and working Americans. That's not fair. Either we should have an energy tax where everyone pays evenly, or we have no energy tax."

Breaux responded, "One argument in the Congress is that we're not going to tax people, just corporations. Well, corporations create jobs. And I think it's wrong for us to be trying to shift and tax production in this country. We should be taxing consumption in order to come up with a cleaner environment and more conservation."

Treasury Sec. Lloyd Bentsen said, "Whatever they come up with, I'm convinced that (the energy tax) you're going to see for truckers, for the airlines, for railroads, for people driving their cars, that energy tax won't be any higher than what was proposed in the House (the BTU tax)."

ENTITLEMENTS REVOLT

The finance committee's bill also may face major problems on the Senate floor.

Eleven Democrats who do not sit on the finance committee have warned Moynihan they would oppose any additional cuts in Medicare and Medicaid that would increase costs for the elderly and poor or reduce access and quality of health care.

Democrats have a 56-44 majority in the Senate, and all the Republicans are expected to vote against the deficit reduction bill.

Sen. Tom Harkin (D-Iowa), one of the 11, said, "Middle class Americans have been taking blows for the past 12 years, and I will not support changes to the deficit reduction plan that asks them to sit idly by and take some more, no matter whose plan it is."

Harken also complained about the prospect of an energy tax that singles out gasoline.

"The state of North Dakota, for example, the per capita use of gasoline there is twice as much as it is in New York. So therefore the distribution is not even and not fair.

"We're not going to accept anything that comes out of the finance committee that hits the elderly, puts additional taxes on the middle class, and reduces the share that the wealthy have to pay."

BTU TAX REVIVAL?

Meanwhile, the Clinton administration has been hinting it may try to revive the BTU tax in the House-Senate conference committee.

Since the House bill includes a BTU tax the representatives it names to the conference committee are obliged to back the BTU tax there, unless instructed otherwise by the full House. The Clinton administration will have much input in that decision.

The administration also will have much influence over the outcome of the conference, since the Democratic leadership in both Houses will hand pick the conferees.

Clinton has been careful not to say he has abandoned the BTU tax. Bentsen is the only member of the administration to declare the BTU tax dead.

Last week Clinton said he just wants the finance committee to move forward with a bill and keep the deficit reduction package alive.

"The Senate finance committee has some tough decisions to make. I don't expect to agree with all of them. But the real test will be what happens in the conference and what the final bill looks like that the House and Senate will vote on."

He also told reporters June 10 he still favors a broad-based energy tax and said, "I have not signed off on any energy proposal in the Senate vet."

Breaux said, "The president is letting the Senate work our will, whatever our will is going to be. But I think that they are not supportive of the concept that I offered."

Bentsen claimed Clinton "fought for a BTU tax. He understood that there would be modifications and changes to that tax. He still believes that. He's still for a broad based energy tax and we'll see what the Senate comes up." He also noted the final bill "will be resolved between the House and the Senate."

POLITICAL HEAT

Due to the perception that it has abandoned the BTU tax the Clinton administration has come under fire from many House Democrats.

The BTU tax is a hot issue for House politicians. Some say the tax proposal helped Republican Kay Bailey Hutchison oust Democrat Bob Krueger in a race for a U.S. Senate seat from Texas. Although both candidates opposed the BTU tax Hutchison tried to link her Democratic opponent to the administration's unpopular tax.

Many House Democrats did not want to vote for the BTU tax fearing it would be changed in the other body, and voted for it only after receiving the administration's pledge that it would stand by the BTU tax in the Senate.

The Clinton administration cannot afford any defections in the House, since the deficit reduction bill and BTU tax passed by a rather small margin, 219-213.

Administration officials and House Democratic leaders have been urging House members to be silent on the Senate measure until the House-Senate conference committee forges a final bill.

But the Congressional Black Caucus has warned the administration that if it does not stand by the BTU tax it will cast its 39 House votes against any deficit reduction bill that contains another kind of energy tax.

In a letter to Clinton, the caucus said it would not accept a bill "that shifts the burden from the wealthiest Americans and corporations to the disadvantaged."

Rep. Bill Richardson (D-N.M.) predicted the White House could lose 4050 House votes if the compromise bill included a smaller energy tax such as a transportation tax and if it made deeper cuts in medical programs.

Rep. Dan Rostenkowski (D-Ill.), chairman of the tax writing Ways and Means committee, has assured fellow House members, "This guy hasn't sold us out. He still favors our bill."

And Clinton has told House Democrats they "didn't walk the plank on the budget for nothing. Their budget is going to be part of the conference."

INDUSTRY REACTION

The American Gas Association applauded the shift from a BTU tax to a transportation tax.

Mike Baly, AGA president, said, "Deficit reduction is the ultimate goal of the president's economic package, so we are pleased that the discussion of how to achieve that goal is shifting to more spending cuts and an energy tax component that will not only raise revenue but will simultaneously address the nation's goals of improving the environment and reducing the use of imported oil.

"A transportation fuels tax such as the one proposed by Sen. Breaux, is superior to a BTU tax in all respects and accomplishes the goals listed above.

"Such a tax would be simple to administer, with the collection mechanisms already in place, and would not materially affect the cost of American goods and services, either at home or in world markets. And that means no loss of American jobs, while our nation takes meaningful steps toward deficit reduction."

The American Petroleum Institute had strongly opposed the BTU tax but also dislikes any gasoline tax that is not used for highway construction projects.

API is concerned about erosion of the alternative minimum tax relief contained in the House bill.

"We favor the simplification and moderation of the AMT in the House version of the budget package. We hope that it will be part of the budget proposal that will be approved by the Senate finance committee."

ENVIRONMENTAL CLAIMS

Environmental groups heavily favored the BTU tax but largely have been silent on the issue of higher gasoline taxes.

Resources for the Future (RFF) said the effect of an BTU energy tax on environmental quality has been ignored in the debate.

It said in comparison with more traditional tax alternatives a BTU tax entails larger nonenvironmental costs to the economy but has the attraction of inducing larger reductions in emissions of major pollutants.

It said a BTU tax and a carbon tax that raise the same amount of revenues would have a similar effect on the environment, but the carbon tax would affect households more unevenly across regions than a BTU tax.

RFF said a gasoline tax of 7.6cts/gal would reduce gasoline use by 3.3% and raise $7.5 billion/year in revenues but would fall heavily on rural areas and the poor.

And it said in New York City, a 7.6cts/gas gasoline tax would be a cost effective way of reducing volatile organic compounds emissions, a precursor to ground level ozone.

It said a BTU tax of the general type proposed by the administration would generate larger macroeconomic disturbances than either a value added tax or a personal income tax increase with the same revenue yield but would be more beneficial to the economy from an environmental standpoint.

RFF said, "It is necessary to have an energy tax that will affect coal in order to realize many of the most important potential environmental benefits."

Copyright 1993 Oil & Gas Journal. All Rights Reserved.