OIL TAX A FATAL FLAW IN CLINTON PROPOSAL

Among all that is objectionable in President Clinton's proposed energy tax, one element should trouble the oil and gas industry most. It is the explicit official intent behind the BTU rate differential to create market disadvantages for oil. The ironic prospect that oil use won't suffer much from the extra burden simply fits the pattern of an altogether misguided initiative, little of which will function as advertised.

March 1, 1993

3 min read

The proposal will not, for example, increase federal revenues as much as the administration promises that it will, if it increases them at all. Recent history shows that with federal receipts at 18-19% of gross domestic product new taxes reduce total revenues by discouraging economic activity and shrinking the income tax base. And a direct energy tax will erode its own base by discouraging consumption-one of the stated benefits, after all.

A related "benefit" also might not materialize. The 34.2cts/MMBTU "national security" levy on crude oil atop the basic 25.7cts/MMBTU energy tax is supposed to encourage use of natural gas. Yet at current prices, points out East-West Center's Fereidun Fesharaki, the percentage price gain for natural gas will be nearly twice that of oil. At least in the near term, gas use will suffer.

LOOKING SERIOUS

Unintended results like these happen when government tears through the private sector on a money binge. To some, looking serious about the federal budget deficit matters more than whatever miscues arise in the details. Clinton thus derives considerable support, including some from oil companies, because he has a plan, any plan, the wrinkles of which can be ironed out later. But the plan's deliberate attempt to recalibrate energy markets to official liking is more than a wrinkle.

Consumption reductions presumed to result from disproportionate taxes on oil, the administration says, will help the environment, national security, and energy efficiency. Steady air quality gains in the U.S. apparently don't matter now. Neither do reformulated gasoline, ultra-low sulfur diesel, and other hugely expensive steps to resolve the few air pollution problems that remain. Under Clinton, Americans would have to pay more for ever-cleaner oil products and use less of them-all in the name of the environment, of course.

The irony of a "national security" oil tax from an administration attempting to gut military budgets is almost too much to mention. Worse than that is the blithe claim that government fuel coercion promotes energy market efficiency. Did anyone on the Clinton team pay attention to energy developments of the past two decades?

PHILOSOPHY NEEDS REPAIR

Coming as it does in a sweeping package with grand designs, the oil tax is easy to overlook, easy to dismiss as a clumsy error that can be fixed. But it is the philosophy behind the tax that needs repair, a philosophy evident elsewhere in the package. Oil tax exemptions imply, for example, that energy is more righteously consumed as a petrochemical feedstock than as a fuel, that burning heating oil is more acceptable than burning gasoline, at least for a year. If the Clinton administration had paid attention to energy in the past two decades it would have learned that markets make choices like these better than governments do.

Antioil thoughtlessness constitutes a threat more serious than the tax itself-and not just to the oil industry. It demonstrates a dangerous compulsion to govern by economic fiat. The oil industry should help draw bounds of political reason for this lurching administration. It can begin by crushing a vain effort to dictate economics to the market.