Using Oil Taxes to Improve Fiscal Reform

Economists have long argued that taxing oil consumption would be the most efficient way to address U.S. vulnerability to overpriced and unreliable oil supplies. Yet energy taxes are a third rail in American politics, and have long kept significant increases in oil taxes off the table as a policy tool. However, the growing concern over rising U.S. deficits has recently prompted some people to question whether that might change.

In this Energy Brief, CFR’s Michael Levi and Daniel Ahn model the potential consequences of substituting taxes on oil consumption for either higher nonoil taxes or reduced government spending, both as part of a larger deficit reduction package, and argue that doing so can improve economic performance while reducing oil consumption if done right.