President Obama’s proposed $10.25-per-barrel tax on oil has been met with almost universal derision from the commentariat, especially on the right side of the political aisle.
While I agree with only a few of Obama’s initiatives, I think this one in particular makes a lot of sense. (Though I believe the money should be applied to debt reduction, not additional spending.)
The U.S. budget is a great, hidden issue in this election. And if it was given even a tenth of the time wasted on the hopeless Middle East, we might get somewhere.
The Effects of a New Tax
Now, there are two potential problems with new taxes:
Obama’s proposed oil tax suffers from neither of these. It will increase the price of a gallon of gas by about $0.25 cents, restoring the federal tax to just above its 1993 level in real terms. This increase will be included in the consumer price index and other price indices, so low-income families will get a commensurate increase in social security, disability, and other benefits.
Of course, there are usually individual hardship cases, and I expect Obama’s oil tax to cause more hardship to heating oil users (who are generally poorer than those who use other heating fuels and live in colder places) than to drivers. But even for heating oil users, the tax increase would raise oil costs to around half of their level just two years ago.
As for the tax’s effect on growth, it would be modest, merely lessening the consumer boost from lower oil prices. It wouldn’t affect the supply side at all, aside from lessening consumers’ increasing driving mileage due to the current low oil prices.
Reining in the Growing Deficit
Of all the ways of raising substantial tax money, economically, this is the most benign.
The oil tax would provide $319 billion over 10 years to address the budget deficit. Unfortunately, based on the Congressional Budget Office (CBO) projections, that would still leave $9.1 trillion in deficits unaddressed over 2017-26.
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