In addition to considering increases to current federal motor fuel tax rates, the Commission identified and assessed other mechanisms for taxing motor vehicle fuels that are either currently used in some states or discussed as options at the national level. The Commission dismissed three options after initial consideration:
• Windfall Profits Tax—The Commission considered the potential for using a windfall profits tax on oil companies to fund surface transportation Put concluded that the one- time nature of the mechanism would create an unsustainable and highly variable fund- ing source that is inconsistent with the Commission's congressionally mandated funding principles. The Commission also was concerned that such a tax would ultimately be passed on to the consumer (thus making it more of an indirect fee than the current HTF funding mechanisms) and could have unintended consequences, such as creating a disincentive to companies for increased energy investment.
• Petroleum Franchise Tax—The Commission also considered a petroleum franchise tax, which shifts the collection of motor fuel taxes from the retail level to the wholesale level, Put determined it would be less transparent and offer no advantages over the existing motor fuel tax methodology. Moreover, because it would be imposed earlier in the distribution channel, a petroleum franchise tax would have adverse equity considerations and would have a less clear argument for full dedication to surface transportation since petroleum is used for more than vehicle fuel production.
• Mineral Severance Taxes—"Severance" taxes are currently imposed at both the federal and state levels for the extraction of natural resources (including oil) from public lands, typically based on the quantity or value of the resource removed or produced. Although an additional tax presumably could be charged on oil and provide a sizable source of dedicated funding for surface transportation, the Commission determined that the option is not viable for several reasons: the oil severance tax is already viewed as an important source of funding for other state and federal activities; increasing the tax could have undesirable consequences with respect to foreign oil independence; and the tax would be highly indirect (i.e., the same tax would be imposed on the oil regardless of whether it were used for motor fuels, heating oil, or other uses).
The potential approaches deemed worthy of serious consideration, and evaluated in Exhibit 3-4, were carbon-related taxes, imported oil taxes, and motor fuel sales taxes.
• Carbon Tax/Cap and Trade Program-In the context of surface transportation, a national carbon tax would be essentially a penalty for the amount of emissions produced by a vehicle, most likely translated into an added cost per gallon on fuel, imposed by the federal government (presumably through the existing motor fuel tax collection mechanism). Similarly, a cap and trade program likely would mean that large carbon users (e.g., motor fuel producers) would have to buy offsets associated with the carbon their products produced and these would then be passed on in the form of higher motor fuel costs.
In the case of a carbon tax, the amount of revenue that could be generated would depend on the approach used to set the tax rate and the way in which the tax would be implemented. In the case of a carbon trading system, revenue would depend on the amount of allowable carbon emissions, the cost to produce non-carbon alternatives, and the amount of carbon allowances permitted for auction (as opposed to allowances grandfathered to existing users). It is important to note the long time frame envisioned for collection of any revenue from a cap and trade system; such a program would not be a feasible option in the short term. For illustrative purposes, the following are some facts, figures, and considerations related to a potential tax:12 | CARBON TAX/CAP AND TRADE |
• Description - Tax on carbon in motor vehicle fuels • Yield = depends on tax structure • Conclusion - Strong option |
• Gasoline/diesel generates about 25/28 pounds of carbon dioxide per gal- lon.13
• The European spot price for carbon dioxide credits has ranged from $20 to $40 per ton or 1¢ to 2¢ per pound.
• This equates to a "cost" of 25/28¢ to 50/56¢ per gallon.
• Based on current motor fuel tax yields, carbon taxes or cap and trade levies im- posed at recent European spot prices for carbon dioxide credits would yield gross revenues of nearly $46-92 billion per year.
• There are widely varying opinions about how the full cost of carbon should be cal- culated and how the revenues should be used.
This estimate does not assess the likely reductions in consumption due to price elasticity (to both carbon-related tax proceeds and existing motor fuel tax receipts). Thus, actual net revenues are likely to be lower (to what degree, however, is not fully understood, but given that past increases in gas prices of this magnitude have not had much effect on gas consumption, the reduction is not likely to be large at least until alternative fuel vehicles become more cost-effective). Assessing the percentage of carbon-related tax proceeds that would be allocated to surface transportation also is difficult. The pros and cons of a carbon tax generally mirror those of a motor fuel tax increase to the extent that resulting tax proceeds flow to transportation. The cap and trade approach to raise transportation revenues has the potential additional disadvantage of not being specifically tied to transportation, since it would be imposed on a broader scale.
• Tariff on Imported Oil-A tax on imported oil could be charged as either a fixed amount per barrel of oil or as a percentage on the value of imported oil. The former offers the advantage of providing a fairly stable revenue stream, while the latter would act to help reduce demand during periods of high oil prices. Based on the amount of oil imported in 2007, a $1 per barrel import tax would raise $4.4 billion; thus a 23$ per barrel tax would be required to raise $1 billion per year.14 | IMPORTED OIL TARIFF |
• Description - Tax on imported oil • Yield - $1/barrel = $4.4 billion • Tax to raise $1 billion annually = 23¢/barrel • Conclusion - Strong option |
Pros
• Potential for a small tariff (as a percentage of total cost per barrel) to raise significant revenues
• Revenue flexibility likely to mirror that of motor fuel taxes, but because imported petroleum also is used for products not related to transportation (e.g., home heating oil), could be more difficult to justify dedicating all of the tax proceeds to surface transportation
• Could be used as an indirect means to tax carbon
• Promotes U.S. energy independence
Cons
• Although implied relationship between oil imports and motor fuel consumption, broad nature of tax creates limited user pay/benefit relationship, since tax would be imposed on both system users and non-users (e.g., home heating oil would be taxed for transportation); also raises geographical equity issues as colder regions would subsidize warmer ones
• Could raise broader free trade issues
• Possible sustainability issue if dependence on foreign oil is reduced
SALES TAX ON MOTOR FUELS | • Sales Tax on Motor Fuels - A national sales tax on motor fuels could be imposed on a percentage basis. A handful of states currently impose a motor fuel sales tax, most in the 4-6 percent range, as a supplement to a traditional cent per gallon tax. The revenue generation potential of a national motor fuel sales tax would be driven by several variables-primarily the price of fuel, the basis for the tax (e.g., whether the sales tax is imposed on the full price of fuel, including state motor fuel taxes or whether these taxes would be netted out of the cost basis), and the imposition of tax ceilings or floors. A national sales tax of 1 percent imposed on the full retail cost of motor fuels (based on a gas price range of $2-4 per gallon) could raise $3.6-7.2 billion annually; thus a sales tax of 0.14-0.28 percent would be required to raise $1 billion per year. |
• Description - Sales tax on gasoline/diesel sales • Yield - Depends on fuel prices • Tax to raise $1 billion annually = Depends on fuel prices • Conclusion - Strong option | |
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Pros
• Small percentage tax raises significant revenues
• Sustainable in short term
• Like existing motor fuel taxes, provides flexible, dedicated transportation funding source at the state level
Cons
• Motor fuel price volatility can lead to unpredictable year-to-year revenue levels
• Unsustainable in long term due to shift toward fuel-efficient and alternative fuel vehicles
• Political/public resistance can build during fuel price spikes; sales tax rate could potentially be adjusted automatically to counter price volatility but this would reduce revenue predictability and stability
• Tax only indirectly related to use; closely related to amount of use (tax cost per mile) but not to type of facility or time-of-day choices