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Clinton BTU energy tax allows no exemption for municipal fleets.

The U.S. Treasury Department issued a detailed description of the administration's broad-based energy tax on April 1. As proposed, the tax would be levied on all consumers of energy, including the nation's cities and towns. It could impose as much as a six to seven percent increase on municipal budgets phased in, beginning on July 1, 1994.

The tax on municipalities would set a precedent of one level of government imposing a tax on another. Cities and towns are prohibited from taxing the federal government.

The greatest impacts would be on municipal fleets, lighting, and the heating and cooling of buildings. The administration projects a 7.5 cent increase per gallon of gas, a 3 percent increase in the cost of electricity, a 4 percent increase in the cost of natural gas, and an eight percent increase in the cost of oil.

The BTU would not only affect every city directly, but also indirectly through the impacts on citizens and businesses. Designed to be neutral across the country, the new tax could have variable impacts on cities depending upon the types of businesses located there.

The new tax is expected to raise more than $71 billion over the next four years, making it a centerpiece of the administration's budget and tax package. It would be phased in at 33 percent the first year, 66 percent the second and then fully in the third. Congress is expected to begin working on the President's BTU energy tax soon after it returns from the Easter recess.

What is a BTU tax?

The proposed BTU energy tax is a broad-based tax on the heat generated by an energy source, measured in British thermal units (BTUs). The basic rate for the tax would be $0.277 per million BTUs. There would be a supplemental tax of $0.342 per million imposed on oil, except for home heating oil. It would apply to all but thirteen fuels, exempting biomass, solar, wind, geothermal, ethanol, methanol, bunker and jet fuel used for international transportation, and feedstocks.

Points of Collection

Under the administration plan, the BTU tax would be collected at the source--except for coal. The coal tax would be collected at the utility or industrial producer which purchased the coal to generate electricity; for oil, at the refinery (or importation point for refined petroleum products); for gas, at the pipeline. The tax would be collected at the utility for hydro-and nuclear-generated electricity, and at the point of importation for imported electricity. The President's proposal would provide a downstream credit for non-fuel use of energy such as when petroleum is used as an input in the manufacture of plastics.

How Much?

As a source of revenue in the Clinton plan, the BTU tax would be second only to the proposed changes in personal income tax rates. The BTU tax is estimated to raise more than $71 billion dollars by 1998, with more than $22 billion per year expected when fully implemented.

The proposed BTU tax could both reduce state and local sales and severance tax revenues and, because the tax, as proposed, provides no exemption for cities and towns, significantly increase municipal gas and energy bills. The tax could help the bottom line for cities and towns with local utility taxes, because the base would be increased. The tax is intended not only to raise federal revenues to reduce the deficit, but also to reduce energy consumption--which would, in turn, have the effect of reducing state and local sales and severance tax revenues.

The BTU tax would directly increase the cost of gas purchased for all municipal vehicles, the costs for all lighting and electric consumption, and the costs of heating and cooling all municipal facilities. The Town of Milbridge, Maine (pop. 1300) estimated the BTU tax would increase its annual budget by $1800, while South Portland, Maine (pop. 40,000) estimated an increased mandated cost of about $50,000 annually.

How Do I Figure Out How Much It Will Cost?

To determine the potential direct impact of the proposed BTU energy tax on your city or town, one needs to convert gallons of fuel purchased or kilowatt-hours of electricity to BTUs (See BTU Conversion chart). Then one multiplies by basic BTU rate, except for non-heating oil, where the supplemental must be added. This can be complicated in the case of electricity where different fuel mixes are used.

According to Treasury Department figures, the increase in energy costs for consumers would be modest. Expected price increases range from about 3 percent for residential electricity to 8 percent for home heating oil. The average price for a gallon of gasoline is expected to rise by about 5 percent due to the tax. Administrative burdens may increase energy costs further.

To offset the burden these taxes would place on lower-income families, the Administration would expand the earned income tax credit, as well as the Food Stamp and the Low-Income Home Energy programs.

It is also anticipated that, because the based for the tax is so broad, no one region of the country will bear a disproportionate share of tax. The administration tax plan would have little impact on families earning less than $30,000 annually, where the increase in the Earned Income Tax Credit (EITC) is expected to offset most of the BTU energy tax. For middle income residents, the change would be modest--about $200 more annually, mostly coming from the proposed energy tax. The bulk of the individual tax increases will fall on families earning more than $175,000 annually.

The impact of the BTU tax on industries and businesses in cities could vary widely. Determining how it would affect your city will require working with a local business council to measure and plan for the potential impacts.

Communities with energy extraction and energy-intensive industries are likely to feel a greater burden. Manufacturing is one industry likely to bear the brunt of the tax. The accompanying chart ranks several classes of manufacturers according to one measure of energy intensity. Even within manufacturing categories, there are bound to be winners and losers.

Energy producers would be likely to face a significant administrative and cost burden. Calculating the true impact of the plan is difficult. The treatment of existing contracts between producers and energy suppliers, which typically do not provide for rate adjustments due to increased taxes is an example.


The proposed energy tax is likely to be one of the most hotly contested issues in the Congress. Different interests will be pitted against each other in trying to either defeat or rejigger the package. Because the tax committees must agree to a tax bill within the next two months raising more than $200 billion in revenues, rejecting the energy tax would force very large offsetting tax increases. Consequently, the odds are good that Congress will agree to some form of the BTU tax.

What is almost certain to change is the shape of the tax and the determination of who is taxed and who is exempted in this process.

That makes it important for city leaders to carefully examine the potential impacts of the proposed tax on their cities and towns, on their citizens, and on their business community and to communicate with their Congressional delegations.
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Author:Shafroth, Frank
Publication:Nation's Cities Weekly
Date:Apr 12, 1993
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