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The New $10 Oil Tax: Is it a viable option?

The President Obama Administration is proposing a new oil tax of $10 per barrel. The tax will be used for funding clean transportation plan, which is supposed to reduce environmental pollution and improve transportation system. The funded projects will include the development of autonomous vehicles and high-speed rail system. According to the proposal, the new oil tax will be paid by the oil companies and not the consumers of the oil products. The proposal, as any other tax proposal, doesn’t sound so good. Furthermore, there are several major problems that undermine all possible positive intentions allegedly present in the proposal.

According to proposal, all taxes will be payed by the oil companies from profits and not influence the consumers. Indeed, if the respective law the oil companies will be forced to do the respective financial transactions, but it does not mean that the price of oil delivered to refineries will stay the same. It is naive to assume, that the oil companies that recently lost about 60% of their revenue due to drop in oil prices will absorb $10 per barrel tax, which can eat over half of their potential profit. The tax will represent extra financial burden to the companies and, as any other cost, will be fully passed to consumers: the price of oil products will include extra $10 per barrel. One may expect 20-25 cents per gallon increase in prices of oil products, such as gasoline, diesel fuel and heating oil. Rising fuel costs will be reflected in cost of transportation, and influence profits of wide range of businesses and overall prices of goods. The cost increase is not going to be huge, but it will still drain money, that could be used more efficiently somewhere else in the economy.

The tax money are supposed to be spent on clean transportation projects. The intention sounds very good, since transportation system definitely needs some upgrading. But there is an obvious problem. The projects, such as proposed high-speed rail system, don’t seem to be profitable. They are not attractive as an investment to the point that private sector is not interested in participating. Even subsidies on the local level are insufficient. One needs a new federal tax to fund the project. Not mentioning outrageous costs of construction in government projects, if the high-speed rail system is ever built, it will require continuous subsidies to cover operational costs and probably new taxes.

Since the proposal is likely to meet strong opposition it is not likely to go very far and ever see the light.

See also:

“How much Obama’s oil tax would add to the price of gasoline”

“Oil tax law? It’s not going to happen: Bernstein”

Low Oil Prices: Are They Here to Stay?