Trading on any tax proposal emanating from the White House is a fraught business. While their brevity is tailored exquisitely to this age of 140 characters, the lack of detail coupled with a markedly erratic tendency in policymaking over the past 100 days or so does make for what consultants gently call a range of potential scenarios.
So news that President Donald Trump is open to the idea of raising the federal gasoline tax to help fund his infrastructure spending plans should perhaps prompt traders less to get short of oil and more to get long popcorn, given the likely reaction on Capitol Hill. Still, it raises interesting questions for the oil market at a critical time.
Details are scant (ahem), yet in comments made during an interview with Bloomberg News, Trump said he would "consider" raising the fuel tax, provided the funds were earmarked for investing in highways. This is a perfectly sensible position. The federal tax on gasoline hasn't been raised since Bill Clinton pushed it to 18.4 cents a gallon in 1993 (the tax on diesel also went up that year, to 24.4 cents). Given that gasoline and diesel demand topped out in 2007, but miles driven haven't, and that the cost of maintaining (let alone enhancing) the nation's roads has only gone up, it's clear tax revenue from this source hasn't kept pace.
Add in the fact that Americans are relatively lightly taxed at the pump compared to other parts of the world (see this cool Bloomberg visualization) and that building stuff featured prominently in the president's campaign, and it makes even more sense.
But come on, seriously, this is tax we're talking about. Remember when President Barack Obama mused about adding a $10.25 a barrel tax to oil sales, equating to roughly an extra 24 cents a gallon? That was only last year. And as Kevin Book of ClearView Energy Partners puts it, while the proposal was supposed to be a "conversation starter," it was anything but. Besides the pervasive gridlock in Washington, Obama's plan was too obviously tied to a desire to tilt consumption away from fossil fuels for a Republican Congress; at 24.4 cents per gallon of E10 gasoline , that extra tax would imply a carbon dioxide cost of nearly $28 per ton.
This being Trump, of course, Republicans might not necessarily dismiss a tax increase out of hand, especially if it were linked to shovel-ready employment. Still, it would be a very tough ask. In part, that's simply because some Democrats, whether for climate reasons or otherwise, might be in favor of it.
And taxing one of America's favorite pastimes is just not an attractive proposition, especially at the federal level. While states such as California and New Jersey have instituted big tax hikes on fuels in recent years, local politicians can at least say the money raised will be put to good use within the state (with some semblance of a straight face). It's much harder for a senator to vote extra money to Congress in full knowledge that, even if it actually gets spent on highways, they may well be ones on which their own constituents never drive.
Even so, given the unexpected outcomes of the past year and a climate on tax reform best described as in flux, the oil industry should be feeling nervous.
That's because, as I wrote here, U.S. demand is already showing signs of weakness, despite gasoline costing less than $2.60 a gallon on average:
The federal tax adds up to about 7 percent of the current average price (it's about 9 percent for diesel). But taxes don't end there, of course. As of December, state taxes added up to an extra 25 cents per gallon of gasoline, according to ClearView Energy Partners:
So the implied average tax burden on a gallon of gas is more like 44 cents a gallon, or 17 percent at the current price.
Now say President Trump hoped to fund $400 billion of his trillion-dollar infrastructure spending plan via an extra tax on gasoline and diesel, spread over five years. Based on current demand and maintaining the relative weighting of the tax burden between the two fuels, the federal gasoline tax would jump to 59 cents a gallon, taking the overall burden to 84 cents. Assuming the increase was all passed through, the pump price would jump to $3.15, of which 27 percent would federal and state taxes. As an aside, the extra federal tax would equate to an implicit carbon charge of $46 per ton.
All of which means it likely won't happen, at least not to that extent. Still, with other wildcards out there, such as a border-adjustment tax -- which would definitely play havoc with oil markets -- who knows? And even an extra $100 billion of revenue-raising over five years would add 13 cents per gallon, assuming flat demand for gasoline.
But maybe you shouldn't assume that.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
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Liam Denning in New York at firstname.lastname@example.org
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