Oil Tax Yes, Gas Tax No

Vehicles drive at reduced speed on February 13, 2016 on the A43 highway near Chignin towards ski resorts during a crossover o
Vehicles drive at reduced speed on February 13, 2016 on the A43 highway near Chignin towards ski resorts during a crossover of people going to or coming from the ski stations during the school holidays. / AFP / Jean-Pierre CLATOT (Photo credit should read JEAN-PIERRE CLATOT/AFP/Getty Images)

President Obama has proposed a $10 barrel fee on crude oil to be imposed on oil companies. The fee--to be phased in over five years--would be imposed upstream, presumably at the refinery level. Crude oil exports would not be included in the proposal.

The tax--let's call it what it is--would fund both the beleaguered Highway Trust Fund, which is presently being sustained by cannibalizing other public assets and budget accounts, plus R&D to lead the U.S. towards a clean transportation economy.

The proposal has already been pronounced "dead on arrival" by the person who counts most--House Speaker Paul Ryan. His House majority will not support anything to do with clean transportation or a new tax, and this proposal would do both.

Instead of imposing a new oil tax on travelers alone, what if Congress traded the gas tax for the Obama proposal--getting rid of the federal gas tax altogether? On examination, such a proposal makes more sense since it both helps the driver at the pump and recapitalizes the Highway Trust Fund. Here's why.

First, it is important to understand that the federal gas tax is a consumption tax, not a sales tax--though some states impose an additional sales tax on gasoline as well. Since the transportation sector represents about 70 percent of total oil consumption while passenger and truck consumption represents about 80 percent of transportation oil consumption, the actual incremental tax per gallon on refined gasoline and diesel fuel sold under the Obama proposal is about 18 cents a gallon. This is almost precisely the present federal tax on gasoline of 18.4 cents. However, switching from a retail fuel consumption tax (the federal gas tax) to an upstream oil consumption tax (the Obama proposal), would yield no new net revenues from transportation oil consumers. So what's the point?

The point is that transportation oil consumers are not all oil consumers. About 25 percent of crude oil is consumed either as oil feedstocks in the industrial and commercial sectors (primarily petro-chemicals but also other petroleum products such as asphalt and natural gas liquids). An additional 4 percent is consumed in commercial, industrial and residential heating. Oil consumed as feedstocks are presently not taxed. The tax collected on home heating oil can be waived or refunded. Taxing oil consumption in these other sectors would increase revenues by almost 25 percent while making the oil tax structure more equitable.

Second, no tax is now imposed on oil consumed in the oil refining process itself. However, if oil consumers are going to pay an oil consumption tax it is only fair that the oil refiners pay the tax on oil consumed in crude oil processing as well. Since oil refiners are now prospering from the very low price of the oil feedstocks they consume, they can well afford to pay a tax on that consumption. There is a reason Warren Buffett is gobbling up stock in the largest pure-play refinery stock on the market--Phillips 66. Let's bring the refiners into the tax tent.

Third, there is presently no oil consumption tax paid on the export of refined oil products. About 20 percent of all domestically refined oil products are exported. If the oil consumption tax were collected at the refinery level, that tax would already be "baked into" the price of the exported product. That would significantly increase total oil tax revenues at no increased cost to the U.S. consumer, while also encouraging refiners to sell their refined products into U.S. markets, thus reducing net oil imports.

The Obama proposal, however, has two clear flaws. First, the proposal seeks to implement the tax gradually over five years, while keeping the full gas tax on top of this tax. Instead, it would make more sense to impose the full tax now, while the price of oil is at historic lows--and then eliminate the gas tax gradually as the price of oil rises. A six-cent cut in the gas tax when the average six-month oil price hits $50, $60, and $70 would do it. Second, make it an ad valorum tax so revenues remain stable as the price of oil rises (and gas tax revenues decrease) while keeping the gas tax as a revenue buffer if oil prices, and thus oil revenues, fall further from present levels.

By applying the oil tax to all consumers of domestic oil products, not just U.S. transportation consumers, the Obama proposal would significantly increase total oil consumption tax revenues. By gradually eliminating the gas tax as oil prices rise, the transportation consumer is protected from paying two taxes at the same time--the gas tax and the oil tax. In both cases the Highway Trust Fund revenue problem is solved, regardless of whether the additional revenues fund clean transportation programs.

David Burwell is an expert on the intersection between energy, transportation, and climate issues. He was the staff director for the report, Road to Recovery: Transforming America's Transportation (Carnegie Endowment for International Peace, 2011).