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THE BUDGETARY AND ECONOMIC
EFFECTS OF OIL TAXES
 
 
April 1986
 
 
PREFACE

Taxes on oil or oil products have been suggested as a means of reducing the federal deficit. Beyond their revenue effects, oil taxes would have important implications for the domestic oil industry, for the economy in general, and for the security of U.S. energy supplies. At the request of the Chairman and the Ranking Minority Member of the Senate Budget Committee, this study investigates the budgetary and economic effects of various oil tax proposals. In keeping with the mandate of the Congressional Budget Office to provide objective analysis, the study makes no recommendations.

Philip C. Webre of CBO's Natural Resources and Commerce Division wrote the report under the direction of Everett M. Ehrlich. The section on income distribution effects was written by Frank J. Sammartino of CBO's Tax Analysis Division under the direction of Rosemary D. Marcuss and Eric Toder. Thomas J. Lutton made valuable contributions at early stages of the analysis. Robert Lucke, formerly of CBO's Tax Analysis Division, provided windfall profit tax estimates. Carol Camp, Peter H. Fontaine, and James J. Hearn of CBO's Budget Analysis Division assisted in constructing outlay estimates. The author appreciates comments received from Robert A. Dennis, Victoria S. Farrell, Stephen A. Parker, John R. Sturrock, and Stephan S. Thurman of CBO's Fiscal Analysis Division. The report was edited by Francis S. Pierce, and the manuscript was typed and prepared for publication by Kathryn Quattrone.
 

Rudolph G. Penner
Director
April 1986
 
 

CONTENTS
 

SUMMARY

CHAPTER I - INTRODUCTION

CHAPTER II - OIL TAXES AND THE FEDERAL BUDGET

CHAPTER III - OIL TAXES AND ENERGY POLICY

CHAPTER IV - OTHER EFFECTS OF OIL TAXES

 
TABLE 1.  ASSUMPTIONS AS TO U.S. OIL SUPPLY AND DEMAND AT THREE PRICE LEVELS AND IN THE ABSENCE OF NEW OIL TAXES
TABLE 2.  NET DEFICIT REDUCTION UNDER FIVE OIL TAX ALTERNATIVES
TABLE 3.  APPROXIMATE TAX LEVELS NECESSARY TO ACHIEVE FIVE-YEAR NET DEFICIT REDUCTION LEVELS, FISCAL YEARS 1987-1991
TABLE 4.  NET DEFICIT REDUCTION UNDER AN OIL IMPORT TARIFF OF $5.00 PER BARREL ON CRUDE OIL AND $10.00 PER BARREL ON REFINED PRODUCTS UNDER ALTERNATIVE OIL PRICE ASSUMPTIONS
TABLE 5.  NET DEFICIT REDUCTION UNDER A $5.00 OIL EXCISE TAX UNDER ALTERNATIVE OIL PRICE ASSUMPTIONS
TABLE 6.  NET DEFICIT REDUCTION UNDER A 12 CENTS PER GALLON MOTOR FUELS TAX UNDER ALTERNATIVE OIL PRICE ASSUMPTIONS
TABLE 7.  NET DEFICIT REDUCTION UNDER A 5 PERCENT AD VALOREM TAX ON DOMESTIC ENERGY CONSUMPTION UNDER ALTERNATIVE OIL PRICE ASSUMPTIONS
TABLE 8.  NET DEFICIT REDUCTION UNDER A COMBINATION OF A $2.50 OIL IMPORT TARIFF AND A 6 CENT PER GALLON MOTOR FUELS TAX UNDER ALTERNATIVE OIL PRICE ASSUMPTIONS
TABLE 9.  ESTIMATED EFFECTS OF OIL TAXES ON AVERAGE ANNUAL FUEL EXPENDITURES OF HOUSEHOLDS, BY INCOME, 1982-1983
TABLE 10.  ESTIMATED EFFECTS OF OIL TAXES ON AVERAGE ANNUAL FUEL EXPENDITURES OF HOUSEHOLDS, BY REGION, 1982-1983
TABLE 11.  ESTIMATED EFFECTS OF OIL TAXES ON AVERAGE ANNUAL FUEL EXPENDITURES OF HOUSEHOLDS AT THREE LEVELS OF OIL PRICES, 1982-1983


 
SUMMARY

This paper analyzes taxes on oil or oil products. Such taxes have been proposed for a variety of purposes. One aim is to reduce the federal deficit. Another is "to reduce U.S. dependence on imported oil and its attendent risks to the economy and to national security. Some advocates of oil taxes see them as driving down further the world price of oil. Taxes are also favored as a way to assist the domestic oil industry, which is undergoing a severe contraction.

Oil taxes would accomplish these goals in varying degree, depending on how a specific tax was designed. At one end of the spectrum, an oil import tariff would encourage conservation, the substitution of other fuels, and domestic exploration and production. At the other end, a general energy tax--such as an ad valorem tax on all fuels consumed--would lead to reductions in energy use but would do nothing to encourage the production and consumption of oil substitutes or the exploration and development of domestic oil supplies. Oil taxes also raise a variety of questions as to their effects on the economy, on foreign trade, on the distribution of income, and on specific industries such as refining.

This paper examines five oil tax options:

Since each tax would have different effects depending on the underlying level of world oil prices, and since there can be no certainty as to future oil prices, this report examines the taxes under three alternative assumptions: that oil prices hold steady over the next five years at levels of $23.00 per barrel, $18.00 per barrel, or $13.00 per barrel.

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