While most Americans struggle with high gas prices at the pump, and worry about what it will cost to heat their homes this winter, America seems to be going nowhere fast in addressing its energy problems. Unfortunately, a number of political leaders are advocating increasing refining capacity, giving out billions in home heating subsidies and creating a mileage tax. While these solutions may seem helpful, they’re headed in the wrong direction because they focus on maintaining consumption or constraining transportation. A paradigm shift which focuses on significantly incentifying the conservation of energy is essential to addressing America’s energy, economic and environmental challenges. Incrementally increasing energy supplies, while generally helpful, will be consumed by our growing economy and will not reduce America’s massive oil import needs. If Washington, as well as the states, would raise taxes on energy, particularly gasoline, and offset that with a decrease in individual and corporate income taxes, Americans would be no worse off in terms of total taxes, but we would all have a strong incentive to further reduce energy consumption. Our tradition in America of taxing income in effect restrains growth. What we really need to restrain is the consumption of energy which significantly contributes to pollution, global warming, and our nation’s growing trade deficit. Clearly, if ever there were an example of an appropriate use of tax policy to promote national goals, increasing taxes on energy consumption would be it.
While a significant increase in energy taxes would be different, and something we’d have to adapt to, it would be the right medicine for many of America’s energy, economic and environmental ills. If for example, energy taxes were phased in at a rate of 4.2% per year for the next ten years, by 2015 energy taxes would be amount to 50%, or about $2,500 per household. Assuming a corresponding reduction in income taxes of $2,500 were put into place, Americans would be no worse off in terms of total taxes, but we would all have considerable incentive to buy more energy efficient cars and furnaces and appliances for homes. Businesses would accelerate the installation of more energy efficient production equipment and buy more fuel efficient trucks. An energy tax would spur a wave of investment with long term economic benefits and be a significant source of long term economic growth. An immediate and sustained drop in world oil prices would ensue given the drop in demand. While it may seem counter-intuitive, the best way to reduce long term energy costs is to raise taxes on energy consumption. Recent spikes in the price of gasoline and natural gas demonstrate that “demand destruction” for energy is available to policy makers who seek it as a goal. Increasing energy taxes would reduce demand and cut oil prices, thus mitigating a considerable amount of the tax increase.
A substantial reduction in America’s energy consumption, particularly oil, would also substantially reduce America’s growing trade deficit. In 2005, America will spend roughly $200 billion purchasing foreign oil. Unless Washington, and/or the states, create a significant incentive for energy conservation, America will likely spend another $200 billion for foreign oil in 2006. America’s appetite for oil is draining away our nation’s wealth at an unprecedented rate. A tax on energy consumption would dramatically reduce our foreign oil bill, improve our balance of trade, strengthen the dollar, and reduce upward pressure on interest rates. These would all positively influence the long term growth of the U.S. economy.
Finally, a significant decrease in energy consumption in the United States would reduce pollution and global warming, as well as restore America to a leadership role in confronting global warming. Reducing energy consumption is essential to reducing the green house gas emissions we are leaving our grandchildren and Gulf Coast residents to deal with.
With respect to consistencies that would likely feel threatened by a significant energy tax, solutions are available to address their concerns. For example, America’s manufacturing businesses, might consider an energy tax as a threat to their competitiveness. However, not only would a corporate tax decrease partially offset the new energy tax, but the decline in consumption and prices of energy would mitigate the absolute amount of their energy cost increase. Even in energy intensive industries, a powerful incentive to improve energy efficiency would be created, while leaving the net effect on after tax incomes basically in tact. With respect to America’s working poor families, an income tax cut could be structured so as to have no material impact on them other than to provide an incentive to reduce energy consumption. For those that do not make enough to pay income taxes, an increase in the amount of the earned income tax credit would provide an offset to their new energy taxes.
While an energy consumption tax would be politically distasteful, the reduction in income taxes, the drop in oil prices, and the slowing of interest rate increases would offset any real effect on consumers. The perceived discomfort from an energy tax would likely be far greater than real. The phasing in of an energy tax increase would also smooth transition issues. A historic opportunity is at hand to, in one fell swoop, deal with America’s energy shortages, create long term incentives to the growth of the economy, take a significant bite out of America’s growing trade deficit, and make a substantial stride forward in terms of reducing air pollution and global warming. Let us not shrink back from the leadership so essential at this historic turning point.