Why Not a Gas Tax?

By John Greenwald

Whether they know it or not, when Americans say, "Fill 'er up!" at the pump, they are getting one of the great retail bargains anywhere. That's because they pay just 14 cents per gal. in federal gasoline taxes, in contrast to more than $2 per gal. in Europe and $1.75 in Japan. The very cheapness of gas, however, makes it an ideal target for a government bent on stopping a runaway deficit. Gas taxes, which are both easy to impose and could generate large revenues, have gained some surprising support: Ross Perot got high- octane mileage from that idea in his populist run for President. Most Detroit auto executives have long been ardent supporters. Many environmentalists applaud the air-freshening side effect it could have, and even some consumer groups say they could support it.

Yet while jacking up the gas tax might make good economic and ecological sense, it is unlikely to happen anytime soon. Consider just a few of the idea's opponents:

-- Labor leaders

-- Oil companies

-- Advocates for the poor

-- The American Automobile Association

-- Two-thirds of Americans polled on the subject in surveys over the years

-- A majority of both houses and both parties in Congress.

Welcome, once again, to the frenzied world of deficit politics, where every proposal to raise cash seems to run afoul of what former Senator Russell Long used to call Washington's view of tax reform: "Don't tax me, don't tax thee, let's tax that guy behind the tree." Ever since Treasury Secretary Lloyd Bentsen floated the notion of "broad-based" energy taxes to trim the deficit, companies and interest groups have been mobilizing for mass mailings and call-in campaigns. At the same time, lobbyists have been frantically imploring Washington to stick someone else, anyone else, with the bill for higher taxes. "The coal boys are going nuts," says a congressional energy expert. "The American Petroleum Institute is going nuts. Everyone is lobbing grenades at everyone else."

The clamor will rise to a combustion-engine din after Clinton finally unveils his economic program next week. "As soon as it's introduced, there will be interest groups jumping all over the proposal," says Sam Gibbons of Florida, ranking Democrat on the House Ways and Means Committee. "It will be like another industry springing up in Washington. You won't be able to find a seat in the restaurants here, the city will be so jammed with people looking for exceptions and loopholes. You wait and see. You'll wind up with one paragraph of legislation levying the tax, and 40 pages on all the exemptions."

So far, Clinton has made no firm decision on new energy taxes. But he has been gingerly testing the public's reaction to various proposals. "They're putting more balloons in the air than a national convention," quips Tom Burns, an economist for energy giant Chevron. In private, the President's economic advisers concede that the real debate is over which fuel to tax rather than whether to tax at all.

In Congress, Democrats are waiting to see what Clinton proposes before sticking their own necks out on behalf of energy taxes. "We've been asked by the leadership to hold back and not launch any grand ideas until the President gets his chance," says Gibbons. "So we'll all cooperate and wait." That strategy is both courteous and expedient: by letting Clinton take the lead, Congress ensures that the new Administration will catch most of the heat.

But there will be more than enough heat to discomfort all involved. Groups ranging from the U.S. Chamber of Commerce to the League of United Latin American Citizens, which represents 300,000 Hispanic Americans, are running hard to head off new energy taxes. Many lobbyists stoutly oppose all the ideas being floated.

"There has been plenty of evidence from past experience that the last thing the economy needs is an increase in energy costs," says William Karis, executive vice president of CONSOL, the second largest U.S. coal company. Concurs Thomas Kuhn, president of the Edison Electric Institute, which represents major power companies: "The best way to increase revenues is to encourage the expansion of business activity. Energy taxes do the opposite."

To spread the pain as evenly as possible, Clinton is focusing on the so- called broad-based energy taxes that would hit producers and big customers like public utilities. Such proposals include a levy on the carbon content of each fuel and an ad valorem -- or sales -- tax on the wholesale price of energy. The front runner is a tax that would be levied on the amount of heat produced by a fuel, as measured in British thermal units. This BTU tax would achieve more pollution control than a straight sales tax and would be less draconian than a carbon levy, which might cripple the carbon-rich coal industry.

Yet even as it seems to favor the BTU idea, the Administration insists that it is keeping all energy options open. The battles raging around the major fuel tax proposals:

GASOLINE TAX

Supporters of this measure are taking a beating even though the average U.S. pump price of $1.16 per gal., when adjusted for inflation, is the lowest since the mid-1960s. (The cost includes 20 cents per gal. for state and local levies.) Moreover, each penny increase in the federal tax raises about $1 billion in revenues. Trouble is, the tax has far fewer friends than enemies, including Clinton, who is wary of measures that might put him between Americans and their cars. It is also the most politically volatile form of energy tax, because it is the most visible.

The gas tax does have some powerful backers. Among them: Dan Rostenkowski of Illinois, chairman of the House Ways and Means Committee, and Michigan's John Dingell, who chairs the House Energy and Commerce Committee. "Who's gonna conserve energy as long as gas is cheaper than bottled water?" asks Dingell, who favors the tax instead of strict new mileage standards for Detroit's automakers as a way to encourage gas conservation. Consumer groups say they could also live with a tax if some of the revenues were returned to low-income families.

Yet the nays appear to have it. William O'Keefe, executive vice-president of the American Petroleum Institute, the voice of the U.S. oil giants, calls a new gasoline tax the worst choice of the lot because it could clobber regions where people drive long miles and would be "extremely regressive." The American Trucking Associations has sent out bulletins to 35,000 trucking companies to begin mobilizing for battle. "We're loading guns," spokesman John Doyle told the Wall Street Journal. The threat of a tax hike worries individuals like Rebecca Harrison, who owns a Los Angeles flooring company with four trucks that run up a monthly gas bill of $1,000. "For my business, it would mean another $400 or $500 a month," Harrison says. "It would hurt."

OIL-IMPORT FEE

This tax would pit Northern oil users against Southern producers and has already stirred a cat fight within the energy industry. Nineteen Congressmen from New England, which depends more heavily on imported oil for electricity and home heating than any other region, last week sent Bentsen a letter opposing an import fee. Complains William Whall, a blind Korean War veteran who lives in New Hampshire: "I just converted to oil heat, and now Clinton wants to whack me with an oil-import fee. I can't stand it. It seems like you get taxed if you do and taxed it you don't."

Among oil producers, talk of an import fee has created tension between Big Oil and its smaller brethren. The struggling little guys love the idea because slapping a fee on the 7.8 million bbl. of foreign oil that Americans import each day would boost their own prices and help finance new exploration and production. "People don't realize that we've lost more jobs than the auto, steel and textile industries combined," says an industry lobbyist. Falling prices in the oil patch have cost producers 450,000 jobs, or 60% of the work force, over the past decade.

But Exxon and other behemoths oppose the idea: most get the bulk of their oil from foreign wells. Exxon chairman Lawrence Rawl flatly declares that the fee "wouldn't work" and "would not be in the interest of the economy, the consumer or American industry." Among other drawbacks, critics argue, the fee could violate terms of the North American Free Trade Agreement (by taxing imports from Mexico). "The import fee distorts the market and would be a subsidy for domestic producers," says Ed Rothschild, energy policy director for Citizen Action, the largest U.S. consumer lobby. "Most important, you will never get it through Congress."

CARBON TAX

The dream of environmentalists is the nightmare of producers and users of coal, which contains more carbon than any other fuel. Supporters like Vice President Al Gore praise the idea because it would cut emissions of carbon dioxide, the main culprit in global warming. "It fights the deficit and it fights pollution in a big way," says David Doniger, a senior attorney for the Natural Resources Defense Council.

But the tax would also blast coal mining states from Pennsylvania to Colorado and would raise costs for coal-burning utilities and their customers. In a recent letter to Clinton, Richard Disbrow, chairman of the American Electric Power Co. argued that a coal tax would "burden the steel, auto, metalworking, chemical, plastics, paint, paper and primary manufacturing industries, which rely heavily on coal-fired electricity and carbon-based fuels." Such objections seem likely to doom the levy. "Forget the carbon tax," says a top Democratic strategist on Capitol Hill. "If you're looking at 1996 -- and they are at the White House -- that would cost them Ohio, Illinois and Pennsylvania."

SALES TAX

This looks like Clinton's No. 2 choice. A 5% sales tax on energy would raise $18 billion a year and cost the average family about $100 a year in higher gasoline and electric bills. But oil and gas producers object that the levy would favor coal companies because their fuel is cheaper and they would therefore pay fewer taxes. Environmentalists complain that a sales tax would fail to sock it to coal and thus do little to help stop global warming. "It misses a tremendous opportunity to do good for the environment at the same time you're meeting deficit-reduction goals," says Doniger.

BTU TAX

This is the presumed White House favorite. Its impact on the deficit and on consumers' pocketbooks would be virtually the same as that of the sales tax. Yet it would achieve more pollution control because of its greater impact on coal, which has a high BTU content in relation to its price. Even so, a BTU levy would be far less punitive than a carbon tax. "The BTU tax doesn't cause ^ any big shift in fuel choices," says an official of the United Mine Workers union. "We prefer it to the carbon tax, which could destroy our industry." But the levy would still run afoul of powerful interests that reject the very idea of new energy taxes. Says Charles DiBona, president of the American Petroleum Institute: "The deficit is a national problem and requires a national solution, not a tax on a single critical segment of the economy."

Such resistance should come as no surprise to anyone familiar with the passions unleashed in Washington by the thought of economic sacrifice. "If any of these fuel-tax options were politically easy, we would have done them already," says Rafe Pomerance, a senior associate at the World Resources Institute. Some of the impact could be softened by measures like a cut in the stiff Social Security payroll tax. Even so, if Clinton hopes to pare down the deficit, he will have to persuade voters to share the pain and then stick to his guns against all the opponents that are mobilizing to fight whatever he puts forward.

With reporting by Dan Goodgame and Nancy Traver/Washington and Richard Woodbury/Houston