As expected, the budget unveiled by President Obama this week includes a proposed new tax of $10.25 per barrel of crude oil. The revenues raised by this tax would go toward not just shoring up our nation’s anemic Highway Trust Fund, but also expanding it into a more ambitious (and renamed) Transportation Trust Fund that would bring with it a heavier emphasis on public transit projects.
Since most crude oil is ultimately converted to gasoline or diesel fuel, much of the impact of this oil tax would be identical to a 20 or 25 cent increase in the nation’s existing fuel taxes. The primary difference is that a tax on crude oil would also fall on a wider range of products, including heating oil and jet fuel.
In a sense, a tax on crude oil can be thought of as straddling a middle ground between the nation’s current taxes on transportation-related fuel use, and a more comprehensive tax on all carbon emissions. In its budget proposal (PDF), the Obama Administration’s case in support of an oil tax sounds very similar to one that could be made for a carbon tax: “a fee on oil … creates a clear incentive for private-sector innovation to reduce America’s reliance on oil and invest in clean energy technologies.”
In addition to its likely environmental benefits, a crude oil tax of this size could also ensure solvency in the nation’s transportation account throughout the entire 10 year budget window (in contrast to the 2021 insolvency being forecast today), and is described (PDF) by the Administration as generating “a sustainable revenue level … going forward.” Part of this sustainability hinges on the fact that the President’s proposed $10.25 per barrel tax would be allowed to grow alongside inflation in the years ahead. This is in sharp contrast to the nation’s current gas tax which has stagnated at a fixed rate of 18.4 cents per gallon for over 22 years and lost roughly 40 percent of its purchasing power in the process.
Even if a new tax on crude oil is “dead on arrival,” as House Speaker Paul Ryan recently claimed, members of Congress should take note of the inflation indexing component of this proposal and consider its relevance to the gas and diesel taxes already on the books today. As we’ve explained in the past, tying fuel taxes to inflation is smart policy and, at least at the state level, is becoming increasingly routine.