DeFazio chair highways transit panel says tax on oil futures can fund $140 billion transport funding gap
US Rep Pete DeFazio issued a statement today claiming that the solution to a funding gap in the proposed $450 billion six year highway and transit program is a tax on oil futures trades. DeFazio proposes a 0.02% tax on every oil futures contract and a 0.5% tax on futures option contracts. He says this would raise $190b over the six years of the STAA reauthorization, "more than enough to fill the gap." That's $32b/year.
DeFazio (Demo - OR) is a senior member of the House Transportation and Infrastructure Committee and he is chairman of the Highways and Transit Subcommittee. He was one of the four authors of the draft Surface Transportation Authorization Act (STAA) bill released June 18.
The full text of DeFazio's statement follows, then our comment:
"NEWS FROM U.S. REPRESENTATIVE PETER DeFAZIO
"Fourth Congressional District, Oregon
Contact: Molly Simmons—(202) 225-6416
"June 25, 2009
"FOR IMMEDIATE RELEASE
DEFAZIO PLAN FULLY FUNDS THE SURFACE TRANSPORTATION AUTHORIZATION
"WASHINGTON, DC— Congressman Peter DeFazio (OR-04) today released a proposed transaction tax on crude oil securities to pay for the deficiency in the Highway Trust Fund and to pay for the Surface Transportation Authorization Act of 2009.
“A transaction tax on crude oil securities will close the gap in funding a twenty-first century transportation system while lowering the price of oil. This is a win/win,” DeFazio said. “If we put off this transportation authorization we will push off needed reform. Every day we wait people will sit in traffic instead of spending time with their families, every day people are not as safe as they could be because of our crumbling infrastructure, every day our economy suffers when our products sit in traffic jams. Worst of all, every day we wait we continue to be more locked into inadequate funding and the failed policies of the Bush Administration.
"My proposal will not cost consumers one cent but will substantially increase our investment in our transportation infrastructure so we can move beyond the broken policies of the past toward a safer, cleaner more efficient transportation system for the 21st century.”
"The Surface Transportation Authorization Act of 2009 requires $450 billion in funding over 6 years. Because of existing funding mechanisms through the Highway Trust Fund, there is a $140 billion funding gap. A transaction tax on crude oil securities would raise more than $190 billion over 6 years, more than enough to fill the gap.
"The proposed transaction tax on crude oil is 0.02% on futures contracts (a contract to buy crude oil at a previously set price on a future date) and 0.5% on the option for a futures contract (the premium paid to have the option to buy a futures contract). Taxing these derivatives of crude oil will reduce the price and volatility of the market. It is the only revenue source that lowers the price of oil while raising revenue for the Highway Trust Fund.
"The tax is simple; it imposes a small burden that penalizes short-term traders for speculating on the price of oil. The CFTC distinguishes between end users and legitimate hedgers, like airlines and railroads, and short-term speculators. This proposal would rebate all transaction taxes paid by legitimate hedgers. Since the tax is on speculation only, it deters speculation and undermines much of the crude oil price bubble.
"This tax will find broad support and is well documented in economic scholarly papers. In fact, NEC Chairman Larry Summers wrote a paper in 1989 in strong support of financial transaction taxes. It will likely find support from large consumers of oil, including airlines, trucking companies, and railroads, the marketers and retailers of oil and gasoline, and small oil producers." END DeFazio statement
COMMENT: the DeFazio proposal is leftist lunacy.
A tax pitched to extract $32b/year from US trades would see this trading move quickly out of Chicago's Merchantile Exchange and off Wall Street to London, Singapore, Bombay, Hong Kong, Abu Dhabi, Kuala Lumpur, and Toronto, exchanges where no such taxes apply. Futures trades work on small commissions and arbitrage. Even a small percentage tax can make trading uncompetitive with untaxed trades elsewhere.
Since the business being taxed can quickly flee the country, the DeFazio tax will yield nothing, zero, zilch, nought. It has no revenue potential at all.
But it's a bad idea anyway. The claim that futures and options trading increases volatility in the markets and raises costs is baseless. To the contrary options and futures improve the efficiency of markets. They also reduce inventory costs by allowing major consumers to hedge buys of oil without having to actually own and stockpile oil inventories in storage tanks they own or lease.
The DeFazio oil futures tax is a further attempt to move away from the user pays principle which should be at the heart of transportation funding.
Users should pay for costly transportation infrastructure through fees, since the fees they are prepared to pay are a measure of the benefits they receive. Only projects which generate fee revenues sufficient to service capital and operating costs are worthwhile projects.
Fees - tolls in the case of roads - can be varied to prevent overloading of facilities and congestion. Strong profitability will be a measure of demand for extra capacity, weak profitability a signal of surplus capacity - editor