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SUMMARY

One option to reduce the current and future budget deficits is to impose a tariff on all imported oil. Whether or not this is good public policy depends on the potential deficit reduction, the macroeconomic costs that it imposes on the economy, and the extent to which it represents good energy policy. With respect to deficit reduction, a $5 per barrel tariff would reduce the federal deficit by $9.8 billion in fiscal year 1983 and by $10.5 billion in fiscal year 1985. The costs to the economy of such a tariff would be a 0.5 percent increase in the inflation rate (GNP deflator), a similar percentage decrease in real GNP, and a 0.1 percentage point increase in the unemployment rate.

The imposition of an oil import tariff would constitute both budgetary and energy policy. Much of the rationale supporting an oil import tariff is based on the risks imposed by U.S. dependence on imported oil. Specifically, high levels of oil imports leave the United States vulnerable to potential disruptions in foreign oil supplies and their effects on the economy and conduct of foreign policy. By reducing oil imports, we reduce these risks.¹ In the final analysis, whether or not an oil import fee is good energy policy depends on one's assessment of the probability of future oil import disruptions. If this risk is high, an oil import fee may be appropriate. If it is low, the existence of the Strategic Petroleum Reserve may be regarded as adequate protection. In the current world oil market, the presence of significant excess capacity reduces this risk somewhat, although this situation may change should oil demand pick up with the next economic upswing. Moreover, other options might reduce oil imports at equal or less macroeconomic cost, among them natural gas pricing changes and reform of electric utility regulation.

Budgetary Effects

In fiscal year 1983, under a $5 per barrel tariff, tariff revenues would total $9.6 billion; higher windfall profits taxes, $3.8 billion; and higher corporate income taxes from domestic oD producers, $3.9 billion, for gross new revenues of $17.3 billion. Corporate and personal income taxes paid elsewhere in the economy, however, would fall by $4.1 billion, and federal expenditures would rise by $3.4 billion. When these offsets are subtracted from the gross collections, they produce a net federal budgetary effect of $9.8 billion, which could be used to reduce the deficit by that amount. Table 1 of this report presents these calculations for fiscal years 1983 through 1987.

Macroeconomic Effects

The imposition of a $5 import tariff would result in a loss of 0.5 percent in constant dollar GNP in the first year following its adoption. This would lead to additional unemployment of about 100,000 persons, or an increase of 0.1 percentage points in the unemployment rate. After one year, such a tariff would result in an increase in the price level of 0.4 percent, declining to 0.3 percent after two years. Many analysts believe that, under the current monetary policy, any actions to reduce the deficit would entail only small losses in output since lower deficits suggest lower interest rates. Similarly, any increase in excise or personal taxes will have tome negative impact on GNP. An oil import tariff, however, might be less successful in lowering interest rates than other possible measures to reduce the federal deficit by a like amount. The smaller effect of a tariff on interest rates occurs because tariffs (or any sales or excise tax imposed on any commodity) would not only raise the price of the commodity but also the demand for money with which to buy the taxed good. Thus, an oil import tariff would result in a higher level of demand for money than, for example, an income tax increase of like amount. This increased demand for money would put additional upward pressure on interest rates.

It should be noted that the losses in employment and output resulting from the imposition of an import tariff would be reduced if these revenues were recycled quickly through reductions in other taxes.

Energy Policy

The imposition of a $5 per barrel import tariff would reduce U.S. oil consumption by 200,000 barrels per day in 1983 through substitution of other fuels and outright conservation. In 1983, the change in the world price and reduced imports would immediately improve the U.S. trade balance by about $5.5 billion. In the long term, an oil import tariff is a neutral subsidy for alternate fuels and technologies. By raising the price of the oil with which these technologies compete, an import fee encourages a wide range of innovation in the provision of energy sources. The extent of these effects would depend strongly cm whether consumers and producers viewed the tariff as permanent or as temporary.

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1. Congressional Budget Office, The World Oil Market in the 1980s: Implications for the United States (May 1980).