Inequalities in the U.S. Tax System

By Phillippe Benoit and David R. Hill

Recently, much attention has been focused on the inequalities in our tax system that allow some of the wealthiest in the United States to pay very little tax. Energy costs are another area that may raise similar concerns, as poor households sometimes pay more for energy – certainly as a percentage of their income but also on a unit basis – than higher-income consumers. The Biden administration can take a small but important step to address this issue by creating a task force to identify where it is happening and what can be done about it.

Numerous studies show that low-income households spend more of their income on energy than high-income households. In part, these are just math: If a grocery store employee earning $ 25,000 per year and an investment banker earning $ 1 million per year pay the same price for a gallon of gasoline or a kilowatt hour of gasoline. electricity, the grocery store employee pays a much higher percentage of their income for that energy. Additionally, many low-income consumers live in homes with insufficient insulation or older appliances, which can mean they have a higher energy cost than wealthier families. This is a problem that particularly affects low-income Black, Hispanic and Native American households.

What is perhaps more surprising is that poor consumers also sometimes pay a higher price per unit of energy than higher income consumers, and in other cases, in fact subsidize the highest consumers. rich. So just as the poor may face a higher tax rate than the rich, so can energy prices.

For example, as recently described by the Energy Institute at the University of California-Berkeley at Haas, “net metering” programs – which provide financial benefits to encourage the installation of solar home systems – result in the transfer energy costs from high-income consumers to low-income consumers. income earners who do not have access to these benefits (for example, because they do not own houses with large roofs). Simply put, the poorest people pay higher rates because of the benefits given to those with higher incomes.

Another example is efforts by utilities and regulators to use fixed charges rather than volumetric tariffs to recover revenue from electricity customers. Since the poor consume less energy, higher fixed charges may mean that the poor pay more for their electricity per kilowatt hour of use than higher-income consumers.

What may seem small to some is often significant for the poorest households or when considering the overall impact on all these households. For example, 25 million American households have sacrificed their purchases of food and medicine to pay their energy bills. Once again, Hispanic and racial minorities have been hit the hardest.

To fix this problem, here’s what to do.

The critical first step is to identify cases where the poor actually pay more for their energy or where the costs are shifted from the rich to the poor. It will be difficult to catalog them, in large part because of the complex calculations required, but also because there are interest groups that benefit from the current system and will resist efforts to change it. But cataloging prices and cost changes is not enough. People pay electricity not for fun, but because they want a cool house in the summer, a warm house in the winter, cold drinks in the fridge, etc. Poorer families living in poorly insulated homes or with inefficient HVAC systems and devices, use more electricity to get the actual energy supply services they want and need, as has been shown by numerous reports. This problem is already being addressed in some government programs, but much remains to be done to address the disproportionate energy burdens faced by the poorest families.

The second is to answer the question “why is this happening?” In some cases, the driving force is government regulation. Often times, regulation can have a laudable goal, such as encouraging renewables, but it can end up shifting costs to lower-income consumers or making them pay higher unit costs than richer consumers. In other cases, the cause may not be regulation, but the government is well positioned to tackle the problem (for example, energy efficiency investment programs for low-income families).

The third step is to identify pragmatic and achievable solutions. Sometimes this can be a technical exercise (eg revising regulatory cost methodologies). In other cases, the best solution may not be to ease the burden, but rather to compensate poor families in other ways. These distribution efforts should be complemented by initiatives aimed at reducing overall energy costs in order to alleviate the expenses borne by the poor.

So what can we do? President Biden is expected to establish a task force, led by the Secretary of Energy, to tackle this energy burden facing low-income families. The task force is expected to produce a report within a year with recommendations for the administration, Congress and states. Now is the time to address this issue given the growing interest in energy justice and the disproportionate burdens facing disadvantaged American families. In addition, the in-depth review and restructuring of energy-related policies and programs undertaken to meet the challenge of climate change also provide an opening to address the negative impact of the energy system on the poorest families.

Ultimately, more than rectifying inequalities in the structure of energy costs, this effort is about trying to find ways to empower the poor to spend more of their own resources on housing, transportation, etc. recreation and more, without overcharging for energy. The Biden administration should launch this effort now, so that the poor of the United States can benefit from it as quickly as possible.

Philippe Benoit and David R. Hill are both Associate Principal Investigators at the Center on Global Energy Policy at Columbia University. Hill was previously legal counsel to the US Department of Energy and NRG Energy, Inc. and is currently a director at Newlin Road Advisors. Benoit is Managing Director, Energy and Sustainability, at Global Infrastructure Advisory Services 2050. The opinions expressed are those of the individual authors.

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