Democrats Propose New Oil Tax, But What Would It Pay For?

Published Jun 9, 2010. By David Lightman.

Senate Democratic leaders want to impose a 41-cent-per-barrel tax on oil companies to help clean up future spills - more than five times what the companies pay now - but Republicans say the effort is deceptive because there's no guarantee that the money would be used for that purpose.

The proposed fee increase has become the latest weapon in the political war over oil, as lawmakers made the plan symbolic of larger congressional election-year themes. Republican senators said that the fee hike, which would raise an estimated $15 billion over 10 years, would help pay for a host of programs that Democrats are championing.

The dispute is helping to stall an emergency spending bill that would revive expired unemployment benefits, provide money for summer jobs for at-risk youths and pay for other programs. The oil fee would help reduce the bill's potential deficit spending to about $78.6 billion over 10 years.

"This is the ultimate exercise in bait and switch," Sen. Judd Gregg, R-N.H., said Wednesday.

"It steals that money out of the fund," said Sen. David Vitter, R-La., referring to the Oil Spill Liability Trust Fund.

Democrats countered that their eagerness to impose the tax and boost the oil spill fund shows that they're unafraid to take on big oil while Republicans protect the industry.

"I think they are lost in a budgetary argument that really is in effect trying to protect the oil companies from this new tax," said Senate Majority Whip Richard Durbin, D-Ill.

The fee is aimed at bolstering the Oil Spill Liability Trust Fund, which now is funded by an 8-cent-per-barrel tax on oil that's produced in the United States. The fee is set to increase by a penny in 2017.

The fund now has about $1.5 billion available, hardly enough to clean up the Gulf of Mexico spill, which experts estimate could cost more than $14 billion. While BP, the company that's responsible for the spill, has said it will pay for the cleanup, Democrats contend that there's no guarantee that will happen, nor is there any assurance that private companies will be able to pick up the tab for future spills.

As a result, Durbin said, "the Republican position that says we should not impose a new tax on oil companies, to make sure there's enough money in an oil spill fund so that taxpayers won't have to pay for these disasters, is a position which is indefensible."

Republicans say that the proposed 41-cent fee has no basis in sound economics, and Senate Finance Committee staff members concede that the number was chosen largely because it would raise enough money to help pay for the emergency bill. The House of Representatives' version of the legislation, which it approved last month, has a 34-cent fee.

Vitter wants the law to specify that the revenue would be used only to clean up oil spills, but no vote has been scheduled on that.

Both sides may have a case, independent experts said.

The government has many taxes devoted to specific uses. Gasoline taxes help pay for highway construction and maintenance, for instance, and Social Security taxes support that program.

The Republican objection that Democrats want to be able to use money in the oil fund to offset new spending in other areas is "double counting," said Josh Gordon, the policy director for the Concord Coalition, a bipartisan budget research group. "So that is certainly true and a valid criticism."

However, he added, "this is what happens all of the time with dedicated revenue sources and the vast population of federal budget trust funds, because there is no mechanism for the Treasury to actually save the money for future spills."