The old adage of “if you tax something, you get less of it,” is a fundamental economic principle that has far-reaching implications for policymaking and individual behavior. The theory is based on supply and demand, and states that when the price of a good or service is increased through taxation, the demand for that good or service decreases. So in the midst of a national energy crisis, why did President Biden enact a law that imposes a new tax on natural gas?
Tucked into the president’s landmark “Inflation Reduction Act” is a provision that adds a methane fee onto natural gas – an incredibly important resource to the United States’ energy portfolio. The new tax is aimed at curbing methane emissions and will apply fees to companies that produce, process, transmit or store oil and natural gas. Under this tax, energy producers would be required to pay $900 per ton of methane emitted in 2024, $1,200 per ton in 2025 and $1,500 per ton in 2026. In total, the Congressional Budget Office this tax alone would cost producers almost $6.5 billion.
President Biden’s natural gas tax undermines the competitiveness of American businesses in the global marketplace, making it more difficult to produce domestic natural gas. By raising energy costs, the tax will make it more difficult for companies to operate efficiently and remain competitive with firms in countries that do not have similar tax structures.
Though levied on businesses, many in Congress have rightfully observed that this tax would ultimately fall onto consumers through higher energy prices. In fact, Representative August Pfluger (TX-11) recently noted that “new fees or taxes on energy companies will raise costs for customers, creating a burden that will fall most heavily on lower-income Americans.” From that perspective, Pfluger and 31 House Republicans introduced legislation last week to repeal this misguided tax on natural gas with H.R. 484, the Natural Gas Repeal Act.
Removing roadblocks that inhibit the production of natural gas is critical, given its importance to the U.S. economy. For example, natural gas accounted for 38 percent of U.S. electricity production in 2021 and because it is clean-burning, it is largely responsible for a dramatic decline in overall emissions. As a consequence, lawmakers would be wise to do everything in their power to make America more energy competitive, and they should start by repealing this irrational tax.