The Energy Tax Budget

by Iain Murray on February 26, 2009 · 8 comments

in Economy, Energy, Environment, Global Warming, Stimulus to Nowhere

“Not one dime,” said President Obama in his address to Congress, referring to how much extra tax people earning under $250,000 a year will have to pay in his budget. Unfortunately, even if you don’t have to pay extra tax, you will have to pay extra fees for your energy, which are passed on to the government via energy companies. That’s the effect of the President’s cap-and-trade scheme for carbon emissions, an important part of his new budget. Energy companies will have to pay the government for permits for each ton of carbon dioxide or equivalent they emit in the generation of power. They will pass on these costs to the consumer, as has happened everywhere a cap-and-trade scheme has been tried. The Administration will split the revenues between $15bn for alternative energy pork and about $52 billion per year to help pay for the Making Work Pay tax cut/welfare check of $800 for “95 percent of all American workers.” By raising the price of fossil fuel energy and thereby making expensive alternative energy more competitive, the program is also aimed at reducing the amount of greenhouse gases emitted.

How much will cap and trade cost households in increased energy costs? Well, we know from a CBO study last year that a 15 percent reduction in emissions from 1998 levels would cost each household at least $660. That target is about 25 percent more stringent than the budget target, which is simply a return to 1990 emission levels by 2020 (far less than environmentalists demand). So we can apply simple arithmetic to estimate that the current budget cap and trade program will cost each income quintile $510, $660, $870, $1125 and $1635 (in 2006 dollars, slightly more in nominal values) respectively. This is a significant offset to the $800 “tax cut” per worker.

To those who might object that most households have two income earners these days, that’s not true. While the “traditional” family model of a husband supporting his family only accounts for 7 percent of householders now, dual-income families actually account for just 29 percent of households. Moreover, it is the bottom three quintiles that have on average just one earner, meaning that they suffer proportionally more from this energy tax increase.

Finally, for the highest quintile, the lower income limit is just $88,000. If you earn that amount, even if you have two income earners in the household, you will likely lose money from these stealth energy taxes. So will the average household earning between $35,000 and $55,000. So much for “not one dime.”

Tiny Tom February 26, 2009 at 1:11 pm

Regardless of the numbers crunched now, a cap-and-trade scheme cannot be estimated accurately in advance. That is because of the mechanism itself: A "cap" is set (by a government agency) of the amount of emissions are allowable. Then everyone who wants to produce those emissions pay for an allotment. So you will need a quantity X and will be bidding against everyone else, and all the utilities and the factories and the transit systems, etc. Great idea.

Kelsey February 26, 2009 at 1:26 pm

Does anyone think that making the most creative and productive people in our economy shoulder the burden will help it? I agree we don't have income equality in the United States, but this will only disincentivize investment and job creation. Also, if you want to help people in a down market, why would you take away the biggest tax deduction: mortgages. I saw a video earlier that I thought was thought provoking because it was a wonderful summation of global perspectives about Obama's tax increase.

David February 26, 2009 at 8:40 pm

You got it all wrong…when he said "Not one dime", what he meant was "Thousands of dimes."

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