In the final budget proposal of his administration released last week, President Obama has proposed a new tax on oil that would be used to fund new spending on clean energy and infrastructure. A reader asked if I would explain exactly what the president is proposing.

There has been a lot of media coverage on the issue, but I went right to the source: The President’s Budget for Fiscal Year 2017. The new fee is discussed in the section titled Meeting Our Greatest Challenges: Innovation to Forge a Better Future. The budget identifies certain spending priorities (more on that below), that “would be funded by a new $10.25 per barrel fee on oil paid by oil companies, which would be phased in over five years.”

The details on how this fee would be imposed are unclear, but we can surmise a few things. Over 10 years, the fee is projected to raise $319 billion. The fee is phased in over five years, so it would be fully in place in 2022. In that year, the budget shows receipts from this tax of $41 billion. Total U.S. oil consumption is currently about 19 million barrels per day, which is just under 7 billion barrels per year. Thus, the fee isn’t being applied to all of U.S. oil consumption.

U.S. oil production, on the other hand, is presently about 4.2 billion barrels per year. That’s a close match to the tax receipts being estimated from this new fee, which would imply that the fee is only being applied to U.S. oil production. That would certainly be problematic, as it would put domestic production at a disadvantage to foreign producers. A new tax on the entirety of U.S. oil consumption wouldn’t necessarily devastate domestic drilling, but one that is applied only to domestic oil production would have refiners opting for crude oil imports instead. That would put the U.S. oil industry at a severe disadvantage, and would also reduce the amount of revenue raised by the fee as it depressed domestic production.

That’s essentially what happened the last time a similar tax was enacted. In 1980 Congress passed the Crude Oil Windfall Profit Tax Act. The Congressional Research Service (CRS) wrote that the act was not a tax on profits, but rather an excise tax imposed on the difference between the market price of oil and a 1979 base price. The act was repealed in 1988 after raising only $80 billion of the projected $393 billion in tax revenue. The CRS further noted in a 2006 report that the act had reduced the domestic supply of crude oil, making U.S. more dependent on imports.

What is the fee proposed by President Obama designed to cover? It would pay for the 21st Century Clean Transportation Plan, which shows a budget of $320 billion over 10 years — almost exactly matching the projected revenues from the new oil fee. The vast bulk of the spending, nearly $20 billion per year, would fund mass transit and high speed rail, while $10 billion per year is earmarked “to transform regional transportation systems by shifting how local and State governments plan, design, and implement new projects.”

The plan also proposes “just over $2 billion per year on average to launch a new generation of smart, clean vehicles and aircraft.” This spending breaks down as:

• Almost $400 million on average per year over the next 10 years for the deployment of self-driving vehicles

• Approximately $600 million per year for the Department of Energy (DOE) to develop regional low-carbon fueling infrastructure including electric vehicles and biofuels

• Some $1 billion per year for DOE, the Environmental Protection Agency, and the National Aeronautics and Space Administration (NASA), to increase R&D in clean fuels and transportation technologies, including a new generation of low-carbon aircraft

• An average of $400 million per year to ensure that new technologies are integrated safely into America’s transportation system

Congress hasn’t raised the 18.4 cents per gallon federal gasoline tax since 1993. The assumption is that imposing this fee on oil companies instead of increasing gasoline taxes improves its chance of passage. While the fee would inevitably flow through to consumers, the presumption is that the anger would be directed at the oil companies for raising prices, rather than the federal government.    

Although this proposal has received the lion’s share of the media attention in the new budget, the document also takes aim at a number of other tax breaks enjoyed by oil companies. Here is an excerpt from the budget:

Source: Office of Management and Budget

The line items below “Oil and Gas Company Tax Preferences” are those often highlighted as oil and gas producer subsidies. These items fall into the category of tax deductions against income, and cost the Treasury $4 billion to $5 billion per year.

Of course this is all likely to prove moot, as several Republicans have already called this budget dead on arrival. In any case, these proposals highlight President Obama’s priorities during his final year in office.   

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