By The Numbers - How Would the Proposed "Oil Barrel Tax" Impact You?

Picture of a hand holding a gas handle with Gas Tax overlaid on the image

(Image credit: June 25 14)

Representative Peter DiFazio (D, Oregon) has put forth a bill in the House called the "Repeal and Rebuild" Act which proposes to remove the at-the-pump gas tax (currently 18.4 cents per gallon) and replace it with a $6.75 per barrel tax on oil sales.

The Highway Trust Fund is slated to go broke by August without Congressional action to secure funding – the current gas tax generates around $34 billion annually, but the transportation budget needs around $50 billion. A bill sponsored earlier in the year proposed to adjust the current gas tax for inflation and set it at 33 cents per gallon – almost double its current level (.184). However, the Obama administration and House Republicans had a rare moment of agreement that nearly doubling the gas tax on consumers, especially given the sorry state of the economy, was a less than brilliant move prior to midterm elections in November.

So anyways, what would this proposed tax mean to you personally, and what would it mean to your business?

Well, at first blush it seems exciting on a personal finance level – who wouldn’t want to save 18.4 cents per gallon, or say $20 or $30 per top off at the local gas station? But will it work that way in practice? Unfortunately, probably not.

Put it this way -  if you were buying a standard full contract (42K barrels) of gasoline for your company, in addition to the current federal and state taxes you are subject to, you’d be paying $6.75 additional per 42 gallons (1 Barrel). That works out to and extra $6750 per contract in taxes. Yikes.

Say you are a Wholesale/under-the-rack dealer with one hell of a business model and nothing ever goes wrong, and you’ll make a whopping 3 cents per gallon on the entire contract (unrealistic, I know, but bear with me for a minute). That only works out to $1260. In other words you’d have to deliver at a loss of 13 cents per gallon, or more than FOUR TIMES your target margin to absorb the fee.

If you're a commercial business targeting an optimistic 6 cents a gallon, you're looking at a max of $2520. So that would leave you having to deliver at a loss of a little over 10 cents a gallon to absorb, rather than pass on, the fee. 

All of this is to say that it will have to be passed onto the consumer, like pretty much any upstream tax eventually is. Seems like a good idea until you factor in the trickle down consequences. DiFazio has admitted it will be passed on in fact, he reportedly said "I don't understand why they (oil companies) are fighting it when they can pass every penny on".... but if it ends up passing on to the consumer, why bother persuing it in the first place?

Long story short,  $6.75 per barrel works out to a little over 16 cents per gallon (.1607 to be exact). So best case scenario, you may see a penny or two per gallon savings, theoretically, when the cost is passed down to the retail level... but I wouldnt hold your breath on that. 

DiFazio is right however that Congressional action is needed desperately on the Highway Trust Fund issue, beyond the stop gap 6 month measures that have been dabbled with in recent weeks. The Hill quotes him as saying “I introduced a proposal today because I am tired of Congress being all talk and no action” – a sentiment most of us can probably get behind, at least on this issue. 

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