December 16, 2016

Tax Reform Task Force Blueprint Could Lead to Increase in Domestic Retail Prices of Gasoline and Diesel Fuel, According to Brattle Whitepaper

A whitepaper released today by leading energy and commodities expert Philip Verleger and economists at The Brattle Group finds that the U.S. House of Representatives’ Tax Reform Task Force Blueprint (the Blueprint) would lead to an increase in the domestic price of crude oil. This increase in the price of crude oil could trigger significant increases in the retail prices of gasoline and diesel fuels for domestic buyers.

The Blueprint, a new, wide-ranging legislative plan spearheaded by Speaker of the House Paul D. Ryan and Chairman of the House Ways and Means Committee Kevin Brady, includes modifications to the rules on how corporations are taxed. Under the proposed plan, corporations would pay taxes on their net revenue instead of their income tax, and the tax would be limited to the territory of the United States. While there would be significant effects across all industries, the authors of this whitepaper assert that no industry would be more heavily affected than petroleum, largely due to the fact that the U.S. is and will remain a net importer of petroleum for the foreseeable future.

The whitepaper highlights several estimated increases in costs as a result of the proposed border adjustment tax. For instance, according to the authors’ calculations, the retail price of gasoline would increase by 13 percent, or approximately $0.30 per gallon, should the proposed border adjustment tax become law. Retail prices of diesel fuel would rise by approximately 11 percent or $0.27 per gallon. However, should the world prices of crude oil rise, the domestic retail costs would increase dramatically. If crude oil prices rise to the levels forecast by the U.S. Energy Information Administration, the border adjustment tax would be responsible for an approximately $0.55 per gallon increase over what would otherwise be the case.

“The economic impacts of the Blueprint as related to petroleum products will be noticeable,” remarked Dr. Verleger. “Consumers could see increases in gasoline prices of between 10 and 15 percent if world crude oil prices average $50 per barrel. The impacts would be even greater if crude oil prices were to rise to $60 or $70 per barrel. Policymakers must be aware of these impacts, and be prepared for any shifts that may arise as a result of the passage of the newly-proposed legislation.”

The whitepaper, “Border Adjustment Import Taxation: Impact on the U.S. Crude Oil and Petroleum Product Markets,” is authored by Philip K. Verleger, Jr. of PKVerleger LLC and the Payne Institute for Earth Resources at the Colorado School of Mines, and Brattle Principals Kevin Neels, and Pallavi Seth, and Senior Associate Fabricio Nunez. It is available for download below.