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A Better Solution for Gas Prices

A Fuel Price “Reliefbate” v. a Federal Gas Tax Holiday

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Americans get a reminder of President Bush’s failed energy policies every time they gas up their cars. The average gallon of regular gas cost only $1.44 when Bush took office on January 20, 2001, and diesel cost just $1.53 per gallon. Yet today, gasoline and diesel fuel prices are at all-time highs, with gas prices at $3.60 per gallon and diesel prices at $4.17 per gallon.

There is little relief in sight as we head into the summer driving season that traditionally begins Memorial Day weekend. The U.S. Energy Information Administration predicts that gasoline prices would average “$3.60 per gallon in May and June” and also notes that, “should crude oil prices not decline from current levels of over $110 per barrel … retail gasoline prices could end up peaking even higher.” Oil closed near $119 per barrel on April 25. So it’s no wonder that an April Kaiser Family Foundation opinion poll found that “rising gas prices [are] Americans’ top economic woe.”

As prices have skyrocketed during the Bush administration’s tenure, family income has slumped. Median family income was $61,000 when Bush took office in January 2001. Today, median family income has actually fallen to $60,500. The average American household spent nearly 5 percent of its income on gasoline when the price per gallon of gas was only $1.51 in 2001. Now, after adjusting for inflation, Americans spend more than twice as much per gallon.

Americans Suffer While Big Oil Prospers

Low-income households have unsurprisingly been hit the hardest by the increased cost of gasoline. After spending nearly 8 percent of their income in 2001 on gasoline, the 9 million American households earning less than $10,000 annually are now spending an average of $1,292—or 13 percent. Those 6.6 million households earning $10,000 to $15,000 spend an average of $1,311—or 9 to 13 percent of their income—on gasoline. And with looming gasoline price increases, these families will have to struggle even harder to make ends meet.

What’s more, 9 percent, or 306,000, American truck drivers are self-employed and independent. Many of them are owner-operators who contract with a variety of larger businesses or lease their services and fleet of trucks to trucking companies. These independent truckers are essential to the American economy, as they are very involved in long-distance hauling. Yet these small business owners are most susceptible to going out of business with the increase in diesel prices that have risen nearly 200 percent since 2001. The average independent truck driver can expect to spend an estimated $110,000 on fuel in the next year alone—up from an estimated $36,400 in 2001.

American families and small trucking businesses may be suffering, but big oil companies are thriving under the Bush administration. Since Bush took office, the big five companies—BP, Chevron, ConocoPhillips, ExxonMobil, and Shell—have earned a total of $556 billion in profits. This includes a record $123 billion in 2007. And BP, ConocoPhillips, ExxonMobil, and Shell just posted record first quarter 2008 profits—a combined total of $31.7 billion. The BP and Shell huge first quarter profits were “built on the back of record-high crude prices.” Industry analysts called them “astounding.”

In 2004 and 2005, big oil companies also received tax breaks worth over $17 billion over the next decade, including avoiding at least another $7 billion to $9 billion in royalties owed to the U.S. government for oil and gas extracted from federal areas in the Gulf of Mexico.

A Fuel Price “Reliefbate”

Middle- and lower-income families need immediate help to cope with record fuel prices. We can help these families by providing a “fuel price reliefbate” check of up to $450, which will cover some or all of the higher fuel price costs faced by working families due to the increase in gas prices over the last seven years.

The fuel price reliefbate would be applied progressively to families who need it the most. The amount households in each income group would receive in offsets is calculated using the average annual fuel expenditure increase between 2001 and an estimate for 2008 (see methodology for more details). The fuel price reliefbate would reimburse 100 percent of the higher cost of gasoline since 2001—or $450—for families earning less than $10,000 per year. Families with higher incomes would receive a progressively smaller offset. Families earning $50,000 to $75,000 annually would receive $200 or one-fifth of the total annual average increase for gasoline between 2001 and 2008. And families earning more than $75,000 annually would receive no aid. Overall, this portion of the fuel price reliefbate would provide some reprieve to 80 percent of all households and cost $22 billion.

This proposal would also provide independent truckers with a $4,000 fuel price reliefbate, which would offset, albeit slightly, the exorbitant rise in diesel prices. This portion of the  fuel price reliefbate would cost $1.2 billion. There are over 306,000 self-employed truck drivers who spend on average over $110,000 annually on fuel, driving an average of 130,000 plus miles per year. Each independent truck driver would get $4000, which is five percent of the difference between the annual 2001 fuel expenditure and an estimate of his/her fuel bill in 2008.

This short-term relief proposal should be followed by meaningful, long-term solutions.

Closing Tax Loopholes and Recovering Lost Royalties

This fuel price reliefbate may sound like a lot of money, but it could easily be paid for by closing several oil tax loopholes and recovering lost royalties. The bipartisan “Energy Advancement and Investment Act of 2007” had several provisions to close tax loopholes and recover royalties from big oil companies. These provisions would raise $25.9 billion over 10 years by:

  • Modifying Section 199 to exclude gross receipts from the sale of oil and gas from the domestic production deduction. Raises $9.4 billion.
  • Modifying Section 907 to eliminate the distinction between foreign oil and gas extraction income and foreign oil related income. This would combine foreign upstream and downstream income into a single oil basket for foreign oil and gas extraction income purposes. Raises $3.2 billion.
  • Extending the oil spill liability trust fund tax through 2017, and increase it from 5 to 10 cents per barrel. Raises $2.7 billion.
  • Recovering forgone royalties by establishment of an excise tax on removal price of taxable oil or gas from federal waters in the Gulf of Mexico. Raises $10.6 billion.

A significant bipartisan majority of the Senate voted for these provisions as an amendment to the Senate energy bill on June 21, 2007, but it fell two votes short of the super majority of 60 votes needed to end debate and pass the amendment. (Sen. Harry Reid (D-NV) shifted his vote from “yes” to “no” at the last minute to preserve his ability to ask for a revote). This package was coauthored by conservative Senator Charles Grassley (R-IA), and supported by conservatives including Mike Crapo (R-ID), Richard Lugar (R-IN), Ben Nelson (D-NE), Pat Roberts (R-KS), and John Thune (R-SD).

The big oil companies do not need the benefit of these special tax breaks and sweetheart lease deals. Tax breaks worth $2.6 billion annually is barely 2 percent of their total 2007 profits. In fact, the 10-year cost of these revenue raisers is only slightly more than one-fifth of what the big five companies earned last year. During a Senate Environment and Natural Resources Committee hearing in 2005, senior officials from these five companies even admitted that “we do not need” tax breaks as encouragement to explore for oil and gas. Surely these five companies can make a small sacrifice to assist those less fortunate.

The Dangers of a “Federal Gas Tax Holiday”

The high fuel costs have stimulated at least one proposal that would make things worse, not better, for families and independent truckers. Sen. John McCain (R-AZ) recently proposed enacting a “federal gas tax holiday” that would suspend the levy of gasoline and diesel taxes from Memorial Day through Labor Day. Sen. Hillary Clinton (D-NY) supports this proposal, but would pay for it with a windfall profits tax on big oil companies. Sen. Barack Obama (D-IL) opposes it because it would provide few savings to consumers and not curtail oil use.

The proposed gas tax holiday has a number of flaws:

  • It would add an estimated $11 billion dollars to the deficit since he has no plan to pay for it.
  • It would provide money to all drivers and truckers, regardless of income or need.
  • Many economists believe that reducing the price of fuel will increase demand, while supply is constrained by existing refining capacity. Prices may therefore not decline by the entire 18.4 cent gas tax.
  • If the gas price drops due to the tax holiday, then drivers could respond by driving more due to lower gasoline prices. The additional demand could drive the price of gas back up.
  • As demand drives prices up to their previous level, the gas tax holiday would increase profits for big oil companies and refineries without providing any price relief.

This proposal is consistent with Sen. McCain’s huge proposed corporate tax rate cuts that would have reduced Chevron, ConocoPhillips, and ExxonMobil’s total tax bill by $3 billion in 2007.

CAP’s proposal avoids all of the deficiencies of Sen. McCain’s proposals, and has a number of advantages. It would:

  • Assist the people who are suffering the most from record high gasoline prices.
  • Offset some of the higher fuel prices for middle-income households making less than $75,000 annually.
  • Aid those low-income households that do not drive, but face higher prices for food and other goods due to higher fuel costs.
  • Help independent truckers suffering from record diesel prices.
  • Pay for itself over time by eliminating big oil industry tax breaks and recovering lost royalties.

Had President Bush adopted higher fuel economy standards in 2001, motor vehicles today would already be using significantly less fuel, thereby reducing demand and price pressure. Because of his failure to act, families and independent truckers face record high fuel prices and sharp increases in food and other prices of essential goods.

Sen. McCain’s gas tax holiday provides only a mirage of relief. We can provide real assistance to middle- and lower-income families coping with these price hikes by closing big oil tax loopholes and recovering lost royalties. After profiting from high prices over the past seven years, its time for big oil to help American families and small businesses by paying a little bit more in taxes and royalties.

Thanks to James Kvaal.

Methodology

Calculations are based on each income brackets’ average household’s gasoline expenditure in 2001. We averaged the amount they would spend in 2008 based on the current average price of regular gasoline and past consumption patterns. The reliefbate was designed to offset a particular percentage of the estimated fuel expenditure increases for each income bracket. The proportion and amount of the reliefbate declines for successively higher income groups. The total cost of the household and independent trucker reliefbate is designed to equal the revenue from the closed tax loopholes and royalty recovery from the Senate’s Energy Advancement and Investment Act.

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