Enactment of oil import fees is a subject that is raised at least every two years in Washington. Thus far, reason has prevailed and fees have been resoundingly defeated whenever brought to a vote.
The convergence of three events ensures that Congress will give serious consideration to new petroleum taxes this year. First, falling oil prices have persuaded segments of Congress that a fee can somehow be enacted without being noticed by the public. Second, Gramm-Rudman has raised interest in new forms of taxation. Finally, the issue of general taxation of the oil industry arises with House passage of a tax reform bill that reduces the current tax benefits of the oil industry.
The allure of oil import fees remains a mystery. Presumably, many still believe that somehow they would be a "tax on OPEC," serving a national security purpose. Representatives of oil- producing states are attracted to fees because they would provide higher prices for domestic producers.
The fact is, however, that such fees would tax our friends and rob the American consumer of a much-deserved break in the price of this commodity.
In 1985 the top three oil suppliers to the United States were Mexico, Canada and Venezuela, our neighbors and friends. Over 40 percent of our oil imports originated in or were processed in the Caribbean Basin, while less than 10 percent were directly imported from Arab OPEC. Given these figures, an oil import fee hardly seems to be a "tax on OPEC."
On the eve of free-trade talks with Canada, imposition of an oil import fee appears no more judicious than hitting Mexico as it sinks further into debt and another foreign earning crisis.
The facile response is to promise to exempt these two neighbors from fees. But to do so is to target Venezuela and other Caribbean nations for discriminatory treatment. If we exempt all Western Hemisphere nations, then we single out our next largest suppliers, Great Britain and Nigeria. And so it goes. Any move to incorporate exemptions guarantees distortions. Calls to exempt certain countries or home heating oil or to provide rebates for oil-intensive manufacturing exporters, would render an unpromising program unworkable.
Obviously, falling oil prices will have a negative impact on oil exporters, oil producers, the drilling service industry and certain banks with large energy portfolios. But overall, falling oil prices are positive, lowering inflation and providing a stimulus to economic growth. In addition, oil prices are a net gain for resolution of the debt crisis.
Supporters of a fee argue that it accomplishes three worthy public policy goals: revenue for the Treasury, promotion of conservation and incentives at the wellhead to maintain current U.S. production levels. While an oil import fee would accomplish these three goals, it would be the least efficient method for doing so. If these goals are desirable, we should maintain current wellhead tax benefits, such as the deductibility of intangible drilling costs and percentage depletion while taxing oil products at a low level.
Fortunately, it is unlikely Congress will enact an oil import fee. While there is more interest in it in the Senate than in the House, the high-water mark for a fee may be the Senate Finance Committee with its large representation of producer states. Even if the Senate were to enact an oil import fee, whether as part of deficit reduction or tax reform, it would be substantially altered by the House of Representatives. It is likely the House would extend a fee to domestic production, as an excise tax, lowering the fee and broadening the base. This development would be very unappealing to producer states.
Therefore, as the process goes forward, it seems likely that a greater interest will develop in a broader based energy tax or higher gasoline taxes.