ESTIMATED COSTS TO ALASKANS OF THE PROPOSED 1993 BTU ENERGY TAX PREPARED FOR. Alaska Housing Finance Corporation PREPARED BY.

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1 ESTIMATED COSTS TO ALASKANS OF THE PROPOSED 1993 BTU ENERGY TAX PREPARED FOR Alaska Housing Finance Corporation PREPARED BY Steve Colt INSTITUTE OF SOCIAL AND ECONOMIC RESEARCH UNIVERSITY OF ALASKA ANCHORAGE 3211 PROVIDENCE DRIVE ANCHORAGE, ALASKA August 15, 1993 This publication is printed on recycled paper.

2 Estimated Costs to Alaskans of the Proposed 1993 BTU Energy Tax prepared by Steve Colt Institute of Social and Economic Research University of Alaska Anchorage Anchorage AK August 15, 1993 Summary The Btu tax proposed by the Clinton administration in March 1993 levied an excise tax on all forms of energy at the rate of cents per million Btus of heat content. In addition, a surcharge of 34.2 cents per million Btus was to be added for all petroleum-based fuels. The National Association of State Energy Officials (NASEO) developed a worksheet for estimating direct and indirect Btu taxes to households. We used this methodology to estimate overall taxes that would be paid by Alaskans. We made one adjustment to the NASEO methodology by removing the direct consumption of coal by the military from the analysis. Under the adjusted NASEO methodology, the average Alaskan household would pay a total of $154 per year in direct taxes for energy consumed by the household, plus about $251 in indirect taxes, mostly in the form of higher prices for goods and services which use energy in their production. These calculations assign all of the costs of the Btu tax to United States households. Therefore, there is no additional tax burden which falls separately on "business," and in reality some of the tax burden would fall on foreigners. Of the $154 per household direct tax burden, about $69 would be higher gasoline taxes, while the remaining $86 would be for taxes on heating energy and electricity consumed within the home (totals do not add due to rounding). The $86 per household average figure for taxes based on direct residential energy use conceals a wide range of possible tax amounts. Using data from previous research, we estimate that the tax for direct residential use varies from $61 for the average Anchorage household using natural gas and gas-generated electricity to $130 for the average Wainwright household using #1 diesel and diesel-generated electricity. A typical interior household heating with oil and consuming electricity from the mixed generation sources supplying Fairbanks utilities would pay about $128 in direct taxes for residential energy. Finally, it is also possible to estimate the tax burden for heating and hot water only, by fuel type. This cost varies from $45 for a household using natural gas for heat and hot water to $91 for a household using oil heat and electric hot water. Rural residents using higher-thanaverage amounts of diesel for heating would pay slightly higher taxes. For example, in Wainwright the average tax for heat and hot water would be $95. 1

3 Background and Classification of Energy Use The proposed tax rates and assumed energy content of various fuels are shown in the top box on the following page. The Btu tax on various energy products is expressed in familiar units in the middle box. The bottom box shows how energy consumption was classified by fuel type for the NASEO analysis (left box) and how we reclassified the residential consumption by end use for subsequent analysis (right box). There are several ways to classify energy use for a tax analysis. The approach taken by NASEO is to allocate the total national energy use by all sectors to households. The residential sector gives rise to "direct" tax impacts, while the commercial, industrial, and much of the transportation sector gives rise to "indirect" taxes. This is the correct way to look at the tax, since most taxes paid by business firms and state and local government will ultimately be passed on to households, either in the form of higher prices and state and local taxes, or as reduced corporate profits paid to shareholders. Within the residential consumption sector, the NASEO analysis totals up consumption by fuel type. Using previous research studies, we were able to estimate residential direct consumption by end use for two end uses: heating and hot water, and electricity for appliances. Computation of Average Tax Burden using the NASEO Methodology The National Association of State Energy Officials (NASEO) circulated a worksheet to all state energy offices which uses the DOE's State Energy Data Report from 1990 as the source for energy consumption figures from which to calculate overall impacts of the tax on households. The NASEO methodology consists of four parts: 1. Estimate direct residential in-home consumption by fuel type, including the primary fuels used to generate electricity. (The tax would be levied on these primary fuels). 2. Allocate gasoline consumption to households (75%) and commercial sector (25%). 3. Estimate in-state commercial consumption by fuel type, using the same overall fuel mix for electricity generation that was used for the residential sector. 4. Allocate the national total of energy not counted in items 1. through 3. above to individuals based on the assumption of equal per-capita shares. The results of the NASEO computations are shown in the two tables labelled NASEO Form T-1 and NASEO Form T-2. NASEO Form T-1 is a straightforward tally of direct residential sector fuel use by fuel type, plus 75% of motor gasoline consumption. The statewide mix of primary fuels used to generate electricity is used to determine the Btus consumed by the electricity sector and the surcharge for petroleum used in electricity generation. Form T-1 leads to a total direct tax of $30 million, which works out to $154 per average household. Of this, almost half ($69) is due to estimated gasoline use, while $56 is due to heating fuels and $30 is due to all residential 2

4 Tax Rates and Ener_gy Content Assum_E_tions Tax Rates () Energy Content Factors used by DOE Base Petroleum Surcha1 With Petroleum Gasoline Natural Gas Distillate Distillate Electricity E6Btu/bbl E6Btu/Mcf E6Btu/bbl Btu/gal Btu/kWh SEDA p SEDR p SEDR p ,690 SEDR p heat content of electricity Energy Content Factors used by Colt Distillate Btulg_al 135,000 reflects use of #1 fuel note: The notation "E" means "1 O raised to the power:" hence "E6" means "million" Btu Tax on Various Fuels in Familiar Units Million Product Gasoline Natural Gas Diesel Gas-generated Electricity_ unit gallon Mcf gallon kwh Btu/unit Tax 7.5 cents/gallon 24.5 cents/mcf 8.1 cents/gallon 0.3 cents/kwh Ways of Classifying Energy Use for Calculating BTU Taxes e residential trans ort residential Fuel Electricity Indirect Commercial Industrial B ~ res1 'd en f 1a I en d use Direct residential trans_qort residentia Heat Hot water other Electric Indirect Commercial Industrial ISER 14 - Aug A

5 NASEO Form T -1: Calculation of Avera_g_e Direct Taxes to Residents units value year source Direct Transportation Cost of Tax a b c c1 d Total Motor Gasoline Consumption multiply by "residential" fraction Total Direct Transportation Consumption Transportation Btu Tax Rate Trans_Q_ortation Cost of Energy Tax SEDR p 49 NASEO line b NASEO lined Direct Residential Electricity Cost of Tax e Total Net Residential Electricity f Electric Energy System Losses g Total Taxable Residential Electricity Btus g1 Electricity Btu Tax Rate h Actual Base Tax for Electrici!Y_ SEDR p SEDR p 46 NASEO line h Supplemental Tax for Oil Generation i Total Taxable Residential Electricity j Total Petroleum Energy Input to Electricity k Total Energy Input to Electricity I Percentage of Total Input Subject to Petroleum Surtax (line j/line k) m Residential Electricity Subject to Petroleum Surcharge n1 Petroleum Surcharge Tax Rate n Residential Cost of Petroleum Surcharge for Electrici!Y_1n1 * ml o Total Residential Electricity Tax 11ine h _.e_lus line nl % SEDR p SEDR p 50 NASEO linen Direct Taxes for All Other Fuels p Total Res Consumption of Coal q Total Res Consumption of Natural Gas r Total Res Consumption of Petroleum s Total Residential Consumption All Other Fuels (lines p+q+r) t1 Tax Rate for all Other Fuels t Base Tax, All Other Fuels (s*t1) u Petroleum Surcharge v Total Direct Taxes all Other Fuels $E6 $E6 $E SEDR p SEDR p SEDR p 46 NASEO line t Calculation of Total Direct Taxes for State w Total Direct Taxes (d+o+v) x State Population (1990 Census) y Per Capita Direct Taxes z State Average Household Size a1 Direct Cost of Enei:.gy Tax _Q_er Household $E6 $/person persons $/HH , US Census 1990 US Census Average Direct Tax Per Household by Type of Energy Use Resdiential Heating Fuel Consumption $/HH 56 Residential Electricity $/HH 30 Residential Trans_Q_ortation $/HH 69 BTUTN<.WK3 ISER 14- Aug

6 electricity. NASEO Form T-2 tallies up commercial consumption of fuels and electricity. It also pro-rates a large amount of industrial and transportation energy based on population. This prorated indirect tax is substantial; it amounts to $28 million, or $142 per household. Overall, the indirect tax burden comes to $258 per household as calculated by the NASEO methodology. Adjustment to NASEO Results There are two reasons why the NASEO method gives results that are too high. First, some of the indirect tax will be paid by foreign consumers and foreign investors. Second, and more important, the commercial sector totals include consumption by the federal government itself, which would be exempt from the tax. This consumption is potentially significant in Alaska, given the large military presence relative to the total population. We made one simple adjustment to address this problem. We removed all direct commercial sector consumption of coal from the totals subject to tax. Almost all of this coal is burned on military bases for steam and electricity generation. The adjustment is shown in Table SC-1, and results in a $7 per household reduction in annual Btu tax paid. The table summarizes the adjusted results. We did not feel justified in making further reductions to account for military use, partly because the military population is included in the population base used to determine per-household impacts. Calculation of Tax on Heating and Hot Water Using Independent Data We calculated the tax on heating and hot water energy that would be paid by households using the average amounts of various typical fuel combinations. These results are shown in Table SC-2. The consumption data supporting these calculations are drawn from a different set of primary data sources than the State Energy Data Report. The most common fuel combination is natural gas for heating and hot water. These households would pay $45 in tax on an average consumption of 185 Mcf of gas. All-electric households would pay $58, due to the overall inefficiency of generating and delivering electricity for use as heat. People using fuel oil for heating would pay the most -- about $88 per household -- because of the higher tax rate on petroleum products. The bottom box of Table SC-2 compares the aggregate consumption data from the State Energy Data Report (SEDR) with the independent residential estimates we produced from primary Alaska data. There is a high level of agreement between these two sources, which is reassuring given that many of the primary sources we used are probably also the basis of the SEDR. 3

7 NASEO Form T- 2: Calculation of Indirect Taxes from Commercial and Industrial Consum_Q_t1on units value year source Transportation Cost of Tax - - Commercial a Total Motor Gasoline Consumption SEDR p 49 b Multiply by Commercial Fraction 0.25 c Total Commercial Transportation Consumptio 7.5 d Trans_Q_ortation Cost of Tax $ million 4.5 Electricity Cost of Tax - - Commercial e Total Net Commercial Electricity f Electrical Energy System Losses g Total Taxable Electricity - - Commercial h Actual Base Tax for Electrici!y_ SEDR p 47 Supplemental Tax for Oil Generation i Total Taxable Commercial Electricity j Total Petroleum Energy Input to Electricity k Total Energy Input to Electricity I Percentage of Total Input Subject to Petroleum Surtax (line j/line k) m Commercial Electricity Subject to Petroleum Surcharge n1 Petroleum Surcharge Tax Rate n Residential Cost of Petroleum Surcharge for Electrici!YJ.n1 * ml o Total Electrici!Y_ Tax - - Commercial % SEDR p SEDR p 50 NASEO linen Taxes for All Other Fuels - Commercial p Total Commercial Consumption of Coal q Total Commercial Consumption of Natural Ga r Total Commercial Consumption of Petroleum s Total Commercial Consumption All Other Fuels (lines p+q+r) t1 Tax Rate for all Other Fuels t Base Tax, All Other Fuels (s*t1) u Petroleum Surcharge v Total Taxes all Other Fuels Commercial SEOR p SEDR p SEDR p 47 NASEO line t Calculation of Total Indirect Taxes for State w Total Taxes - - Commercial (d+o+v) x Total National Industrial and Transport Taxes to be Prorated y State Population (1990 Census) z National Population (1990 Census) a1 State Share of National Population a2 State Share of Ind/Trans Tax a3 State Total Indirect Tax , ,043 3E+OB 0.2% US Census a4 State per Capita Indirect Taxes a5 State Average Household Size a6 Indirect Ener_gy_ Tax _Q_er Household $/person persons $/HH US Census ISER 14- Aug A

8 Table SC-1: Adjustment to Remove Probable Military Consum_e_tion of Coal Total Commercial Direct Coal consumption 5.1 Assumed fraction of direct commerical coal 1.00 consumption that is military Reduction in tax from eli minating military 1.3 direct coal consumption Reduction per Household $/HH 7 Adjusted Indirect Taxes per Household $/HH 251 Adjusted Total Taxes _e_er Household $/HH 406 Total Adjusted Direct and Indirect Costs for State of Alaska Residents Direct Btu Taxes on Residential Consumption Indirect Btu Taxes on Commercial/Industrial Consumption Total Direct and Indirect Taxes total dollars $per person $per household ISER 14- Aug

9 Table SC-2: Impacts of BTU Tax on Residential Heating and Hot Water Costs #of HH Fuel Mix Tax using Heat Hot Water units Amount fuel Tax$ _Q_er HH Current Bill $/HH percent increase a1 Gas Gas 14.0 a2 Total Tax for all Gas ,060 b1 Elect \ Elect GWh 401 b2 Elect Losses multiplier 3.65 b3 Electricity Total 5.0 b4 average elect. tax rate $/E6Btu b5 Total Tax for Elect/Elect Mix ,163 c1 Propane _\ Propane \ \ 1.1 I c2 Total Tax for Pro_Qane ,301 d1 Oil J 1 Oil E12Btu d2 Total Tax for Oil/Oil Mix ,343 e1 Oil , 115 e2 Elect 0.4 e3 Elect Losses multipli er 3.65 e4 Elect HW Total 1.5 es average elect. tax rate $/E6Btu 0.28 e6 Tax on Electric Water Heat , 115 e7 Total Tax for Oil&Elect Mix , , , , , ,558 7% 4% 1% 7% 7% 4% 6% Comp_arison of SEDR Consum_Qtion Data with Colt 1990 estimates Units SEDR Residential Natural Gas Residential Petroleum Residential LPG (Propane) Residential Electrici!Y_ Bcf E3 bbl GWh 14 1, Colt % diff % 1, % % % ISER 14 - Aug-93 3c

10 Comparison of Tax Paid by Anchorage, Interior, and Rural Residents The statewide average direct tax payment of $86 per year for in-home consumption conceals a wide range, depending on a household's location and type of fuel used. Using data compiled for previous studies of direct residential energy use (heating, hot water, and electricity), we can compare probable tax payments for average households in Anchorage, greater Fairbanks, and Wainwright. These comparisons are shown in Table SC-3. The consumption for each "average" household is based largely on primary data for direct fuel and electricity use. The Wainwright numbers come from a special study of that village. The Anchorage numbers are average residential natural gas and electricity consumption. The Interior electricity number is the averagae consumption in the combined Golden Valley and Fairbanks Municipal utility service areas. Only the Interior direct oil consumption is not based on primary data. Instead, it is based on statewide total residential oil consumption estimates. Because the statewide total includes substantial oil used in the moderate climate of Southeast, we multiplied the statewide average oil consumption for heat and hot water by 1.25 to estimate Interior heating oil usage. The estimates in Table SC-3 show that the typical Anchorage household would pay $61 in Btu taxes for residential energy, while the typical Interior or northern rural household would pay more than twice that. The major difference in tax burden is not due to different consumption amounts, but rather to the much higher tax rate on petroleum products. This higher petroleum tax rate hits rural residents especially hard if they use diesel-generated electricity in addition to heating oil. Fairbanks (and most other metropolitan areas) uses very little oil to generate its electricity, especially since the Bradley Lake hydro project came on line. (This analysis takes account of Bradley Lake in determining the fuel mix used to generate Interior electricity). References Hill, Lexi, and Steve Colt, "Energy Subsidy Analysis," Appendix B in North Slope Borough Energy Assessment. Prepared by Arctic Slope Consulting Group. Colt, Steve, "The Cost of Staying Warm: Alaska's 1990 Heating and Hot Water Bill. UAA, Institute of Social and Economic Research. State Energy Data Report U.S. Dept. of Energy, Energy Information Administration. ISER worksheets: FUELBILL.WK3 4

11 Table SC-3: Residential Energy Use Profiles and BTU Taxes for Typical Alaska Households Anchorage Heatin_g_ and hot water fuel natural _gas Average annual fuel consumption 185 Mcf for heating and hot water Average annual electricity consumption 5,375 kwh (excluding heat and hot water) come_osite heat rate 11,016 Btu/kWh Primary Energy and Tax Paid E6Btu Tax$ natural gas for heat & hot water _Q_etroleum for heat & hot water 0 Total Tax for heat & hot water $45 coal I gas I hydro for electricity _etroleum for electrici!y_ 0 Total Tax for misc. electrici!y_ $15 Total direct tax to household $61 Interior oil 1,357 gal 6,173 kwh 11,355 Btu/kW~ E6Btu Tax$ $ $18 $128 Wainwright #1 diesel 1,174 gal 4,977 kwh 11,835 Btu/kWh E6Btu Tax$ $ $35 $130 IS ER 14-Aug-93 YA