How to Pass a Carbon Tax

How to Pass a Carbon Tax

The United States is making more progress than ever before in reducing its greenhouse gas emissions, but is constrained by a Congress that, even when not denying climate science, displays adamant skepticism about taking action to deal with the implications of that science.

The country will soon need bolder measures to bring more advanced technologies to market and achieve its ambitious goals for 2050. The major options include cap-and-trade mandates or a carbon tax, both requiring action by the Congress.

Exxon – a powerful symbol of the capitalist system – favors a carbon tax. So does candidate for president and democratic socialist Bernie Sanders. As do many conservative economists and environmental activists. Can the United States – after pledges at last month’s Paris summit to sharply curtail its emissions of greenhouse gases – actually pass a tax on carbon as a cost-effective way to slow global warming?

Such action, though not likely in the short term, is still possible. A viable pathway to a carbon tax does exist, but the obstacles are immense.

A major barrier is the fear of elected officials that voting for a tax on energy (unless to build roads) will spark a voter rebellion. In fact, most people in national office today fear all tax increases, even the traditional gasoline tax for transportation infrastructure. That’s why most proponents of a carbon tax are either professors or former elected officials – not the ones who have to campaign for their seats (and, therefore, make the decisions).

The problem is compounded by the regressive nature of an energy tax. Placing a bigger percentage burden on poor people raises questions of fairness and scares off some people genuinely concerned about the environment.

There is a solution – talk less about the tax and more about how the revenues from it will be utilized. If the use of the new money is an afterthought (“we’ve got to do something with it”), many voters will object to a tax that reduces their incomes, however noble the cause. If the new money is devoted to something everyone agrees we need anyway, even those who don’t see protection of the atmosphere as a priority may come to see the carbon tax as a necessary evil.

Conservatives might like to use a carbon tax to reduce the corporate tax, alienating skeptics that the benefits would trickle down to the people paying the carbon tax. Liberals would like to fund federal spending programs, anathema to foes of big government. Neither of these ideas will (or should) fly.

Even without a threat to the global climate, people across the board, however, would like to reduce taxes that discourage employment. The social security tax paid by workers, at least at the margins, discourages some from seeking jobs because of the impact on take-home pay. The portion paid by employers, again at the margins, discourages job creation due to its impact on operational costs. If both the employer and employer contributions to social security were reduced, sole proprietors (most small businesses) would get a double break.

Employment and small businesses are things we want to encourage. Therefore, we should strive to keep taxes on them as low as possible.

At first blush, any cut in social security taxes appears to be a non-starter. How could we jeopardize the finances of the major federal program that supports retirement?

The pairing of carbon taxes and reductions in social security contributions, however, makes sense, in part because both payments are regressive, taking away a potential killer argument against the carbon tax. In addition, social security taxes would only be cut to the extent that revenues were replaced by carbon taxes, protecting the security of retirees. This idea is not new; economists like Stanford’s Lawrence Goulder have written for decades about such revenue-neutral ways of taxing carbon.

But current policy makers need to learn the lessons of the period after the 1973 Arab oil embargo, when it appeared that hefty gasoline taxes might be imposed to encourage conservation. Both the 1975 effort led by House Ways and Means Chairman Al Ullman and the 1977 proposal by President Jimmy Carter had good revenue recycling plans attached to them. However, the tax (the stick) dominated the discussion, and the return of the money to the people (the carrot) was virtually ignored. From the public’s perspective, the doctor was prescribing tough medicine without all the benefits being evident.

These lessons are pertinent for the future of climate policy. There will need to be a lot more public discussion about the carrot part of the equation. Members of Congress shouldn’t try to steer the money from a carbon tax to their pet projects. The money will have to offset the regressive tendencies of an energy tax and be broadly acceptable to liberals and conservatives. The plan must be transparent and easy to explain.

Plenty of people would benefit from cuts in social security taxes – especially small businesses. Presenting them a viable plan how this could be done might make the carbon tax seem a lot less onerous (except to energy intensive industries). This is a dance in which the tax cuts, not the tax increases, must be the lead partner.

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