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June 13, 1993
"Bye, Bye, BTU; Pollution-based Energy Taxes are Better"
San Jose Mercury News
By Timothy Taylor
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AS ORIGINALLY proposed, Clinton's energy tax did have the advantage of obscurity. The tax was to be levied according to the heat content of various fuels, as measured by British Thermal Units. Even today, with the term continually in the news for months, probably not one American in 100 knows that a BTU is the amount of heat it takes to raise the temperature of one pound of water by one Fahrenheit degree. One congressman joked that he would try to persuade his constituents that it was a tax on the British, and not an energy tax at all.

But lack of clarity formed no barrier to the organized opposition. The National Association of Manufacturers argued that the tax would hurt consumers, damage U.S. competitiveness, and eliminate jobs. The American Farm Bureau countered that the rural sector would be hurt even more, because "agricultural production is highly energy-dependent," and because rural Americans drive longer distances.

A special interest fungus called the Affordable Energy Alliance sprouted up overnight: "More than 1,000 diverse manufacturing companies, farm organizations, business trade groups and industry and state associations have come together to fight the Clinton Administration's proposed BTU energy tax." The membership list runs from A/R Packaging Corporation and A.E. Boyce Company all the way to Z-World and Zurn Industries.

Amidst the jangling of these complaints, allow me to chime in with my own: From the start, Clinton's energy tax was not nearly large enough, and was aimed in the wrong direction.

These problems will only be compounded by Clinton's decision last week to abandon the terminology of a "BTU tax." Now, he is asking the Senate to design a fair and wide-ranging energy tax, which is roughly like asking a pack of wolfhounds to design a side of beef. Once they've all taken their pound of flesh, the result won't be a pretty sight.

The most useful insight for designing an energy tax stems from the realization that energy use, in and of itself, is not sinful. Instead of taxing the heat content of energy, or the sales price, it makes more sense to tax the pollution produced by the energy. A tax on the carbon content of fuels, for example, would raise money for the government while providing an incentive to move toward less-polluting sources of energy.

For better or worse, however, the specific design of the tax doesn't seem likely to matter much to anyone but the lobbyists, because it doesn't appear that the tax will be large enough to have a substantial impact on how much energy is used. Clinton's original energy tax was supposed to collect about $70 billion over five years; the current chatter predicts a tax that would collect perhaps $8 billion per year over the next five years.

From an economic standpoint, that's about one-seventh of 1 percent of the U.S. economy, or about one-half of 1 percent of this year's federal spending. A tax increase of this size is like a ping-pong ball in a bowling alley; it's not likely to have much effect.

Such a small tax has predictably minimal effects on energy consumption. According to Clinton administration forecasts, the original version of the BTU tax would have cut U.S. energy consumption by perhaps 2 percent, over five years. The scaled-down, loophole-riddled tax now being concocted in Congress will do even less.

Any spending cut or tax increase will hurt somebody, somehow, sometime, somewhere. The case for a much larger energy tax is not that the tax is pain- free, but that unlike raising income or corporate taxes or cutting Medicare benefits, this method of reducing the budget deficit provides some additional benefits.

A pollution tax, for example, might both reduce air pollution and act as insurance against the possibility of a greenhouse effect. A tax of $30 per ton of carbon emitted by any fossil fuel, for example, would stabilize the amount of carbon emitted over the next decade; push business toward innovative conservation and cleaner sources of energy; and collect about $180 billion over the next five years.

In addition, a substantial energy tax can serve as a sort of insurance premium against the possible disruption of foreign oil supplies. Lest we forget, the U.S. recently bombed civilians in part because our economy has a vital economic interest in foreign sources of energy. If the Middle East flares up again, as it has a repetitious tendency to do, an energy tax can simply be reduced for a time, thus cushioning the U.S. economy from immediate adverse effects.

Of course, substantially higher energy taxes should be phased in over time; it never makes sense to impose high taxes overnight. But once in place, high energy taxes are clearly compatible with a high-growth economy. After all, Germany and Japan have done quite well in recent decades with energy taxes that are double and triple U.S. levels.

Both Clinton's original BTU tax and the "transportation tax" currently being kicked around the Senate would raise the price of gasoline by about 7.5 cents a gallon. The niggling differences are over whether to tax other energy sources as much, or at all. In a more sensible world, the argument would be over how to gradually phase in pollution-based energy taxes that would be at least five times as large.

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