While our leaders in Washington seem to believe there’s little they can do to reduce America’s dependence on foreign oil in the short term, there are in fact a number of things they can do, but it will require some creativity and a healthy dose of political courage. For example, if the President Bush and Congress would raise taxes on gasoline, and offset that tax increase with a decrease in income taxes, American’s would be no worse off in terms of their total tax bills, but we would have some pretty strong incentive to reduce our consumption of fuel. If those taxes were scheduled to gradually increase every year, perhaps by 5% per year, while also reducing income taxes by an equivalent amount, Americans and American businesses would have the incentive and a vision for their need to reduce fuel and energy consumption. Our leaders in Washington suggest that technology and increasing domestic supplies of energy are the key to energy independence. However, real reductions in America’s energy dependency, as well, as reducing pollution and global warming, are tied to reducing our consumption of energy, particularly fuel for cars and trucks.
Taxing fuel consumption and the resulting lowering of demand would also reduce America’s balance of payment problems, which would lift the value of the dollar, and reduce upward pressures on interest rates. America’s near addiction to energy consumption sadly not only significantly contributes to the global warming our grandchildren will have to cope with, but it is draining our nation’s wealth away at an unprecedented rate. Over the last twelve months we paid foreign countries, many of which are not our close friends, over $250 billion for oil. We could have kept that money home, and not only paid for mostly American goods, but had something to show for it. Unless Washington begins to truly lead and create appropriate incentives to reducing fuel and energy consumption, it’s very likely that next year we’ll be shipping another $250 billion overseas. And that doesn’t count the more than $100 billion a year we’re spending and near 200,000 American men and women whose lives are in harms way to defend those oil fields. Should we not all bear some of the cost of securing and using the energy we use so very readily consume?
While a significant increase in energy taxes would be different, and probably not liked by many, it would be the right medicine for many of America’s energy, environmental and economic ills. If taxes on all energy consumed were to rise 4.2% per year for the next ten years, by 2015 energy taxes would amount to 50%, or about $2,500 per household. Suppose that tax increase were coupled with a $2,500 reduction in income taxes. We’d be no worse off in total taxes, but we’d have considerable incentives to reduce our consumption of energy. People, recognizing the coming increase in fuel prices would slowly start buying more fuel efficient cars. Homeowners would more readily install energy efficient furnaces, appliances and windows. Industry would accelerate the installation of more energy efficient production equipment. The auto industry would accelerate the design, marketing and introduction of more fuel-efficient cars. 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 decline in world oil prices would almost ensue given the drop in demand.
A fundamental shift in tax policy that incentifies the conservation of energy is essential to America’s well-being. Currently, a substantial portion of American taxes are based on income. Our current tax system in effect punishes who work hard and longer hours by taxing them more. We punish business owners who take risks and work hard to grow their business, by taking a substantial portion of their success away in the form of income taxes. We need Washington to make a paradigm shift from taxing hard work and income, to taxing energy consumption, which damages our environment, our economy, and our national security.
With respect to protecting America’s manufacturing base, some might consider a significant tax on energy consumption a threat to competitiveness. However, not only will the reduction in income taxes partially offset energy taxes in energy intensive industries, but the decline in consumption and prices will mitigate the absolute amount of the cost increase. Even in energy intensive industries, a powerful incentive to improve energy efficiency will be created, while leaving the net effect on after tax incomes basically intact. With respect to concerns about the effect an energy tax would have on the middle class and poor working families, the income tax cut should be structured so as to have no material financial impact on them other than to provide an incentive to reduce energy consumption. For those that currently do not make enough to pay income taxes, an increase in the amount of the earned income credit needs to be provided to offset their energy taxes.
While the energy bill currently being debated in Congress has many positive elements, it needs to be supplemented with an immediate, effective and significant energy conservation element. A tax on energy consumption, coupled with an offsetting reduction in income taxes will produce an immediate reduction in oil consumption and oil prices.
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, make a major stride in reducing America’s trade deficit, and take a huge stride forward in reducing air pollution and global warming.