President Barack Obama this week reaffirmed his desire to tackle the U.S. budget deficit through "a balanced mix of spending cuts and more tax reform." As lawmakers in Congress search for ways to do this, they should take a new look at raising oil taxes. Even if they don't believe that the U.S. consumes too much oil, they will find that incorporating higher oil taxes into a broader deficit package can make strong economic sense.
The U.S. levies small taxes on gasoline, diesel and jet fuel that add up to less than $10 on each barrel of oil consumed. Yet increasing any of these taxes has long been politically toxic. The result, once inflation is factored in, has been a steady drop in the tax rate on oil use.
Economists have argued that higher oil taxes would, in principle, be an efficient way to reduce deficits while curbing oil consumption. Yet few hard numbers have been attached to these claims. And the potential impact of higher oil taxes on economic growth and job creation in a weak economy -- a critical issue given today's still-fragile conditions -- is largely unexamined territory.
We've looked into these questions with an economic model that uses quarterly data stretching back to 1952 to extract relationships among several hundred economic and energy indicators. (Our results were published this week by the Council on Foreign Relations.) We considered oil taxes in the context of the larger tax system, comparing a range of deficit-reduction packages containing only income-tax hikes and government- spending cuts with a dozen variations that incorporate oil-tax increases. And we found that including oil taxes can bring, through the end of this decade, stronger economic growth, lower unemployment and reduced oil consumption -- even while raising more money.