Carbon Revenue – Not Carbon Tax

The word tax has become a lightning rod. Dictionary defined as a charge usually of money imposed by authority on persons or property for public purposes or a sum levied on members of an organization to defray expenses, it has the appropriate revenue need connotation. But when called a burden by some it has become a dirty word; money taken and wasted. A climate-change bill died because “families don’t need an enormous, and hidden, tax increase.” However, if the bill’s authors had instead proposed a simple carbon revenue coupled with an equal, offsetting reduction in income taxes, a dynamic new energy security policy could have taken root. A new study found that a majority of Americans from both political parties favor such a “tax swap” — increasing taxes on traditional energy sources such as oil, coal and natural gas, in return for a reduction in income tax rates. 

This past week British Columbia’s carbon tax — a tax on the carbon content of all fossil fuels burned in the province increased from $25 to $30 per metric ton of carbon dioxide, making it more expensive to pollute. This was good news not only for the environment but for nearly everyone who pays taxes in British Columbia, because the carbon revenue is used to reduce taxes for individuals and businesses. Thanks to this tax swap, British Columbia has lowered its corporate income tax rate to 10 percent from 12 percent, personal income taxes for less than $119,000 per year are now the lowest in Canada, and there are targeted rebates for low-income households. Statistics Canada figures show B.C.’s unemployment rate slid to 6.6 per cent in June from 7.4 per cent in May.

Similarly changing our gasoline tax to a permanent and increasing U.S. carbon tax will reduce the emissions that are driving global warming and generate revenue to help close our looming budget gaps. Support for a carbon tax is growing steadily among public officials; economists; scientists; policy experts; business, religious, and environmental leaders. Such a carbon revenue “shift” can improve the overall output of the economy even without considering climate benefits and thus represents a “no regrets” policy for conservatives who aren’t convinced of the danger of global warming. For environmentalists, the carbon tax could be considered a “tipping fee” to pay the owners of the atmosphere for the service of using that atmosphere as a waste dump for the residues of burning fossil fuels. Proposals for cap-and-trade with offsets cannot deliver the needed emissions reductions and carbon revenue is more effective, less costly and easier to administer.

Closing our humongous federal budget deficit will require a mix of higher revenues and lower spending. For example, California enacted a Gas Tax Swap lowering the state sales tax rate on motor vehicle fuel and raising the state excise motor vehicle fuel tax that provided around $1.1 billion to the state General Fund by reduced funding for transportation and capital projects. Gov. Kasich has also proposed coupling fracking to lowering income taxes. A good rule of thumb is that when you tax something, you get less of it. That means that taxes on hard work, saving and entrepreneurial risk-taking impede these fundamental drivers of economic growth. The alternative is to tax those things we would like to get less of and that would provide substantial revenue that could be used to reduce other taxes.

The revenues from a corporate carbon tax are estimated at over $50 billion annually. A carbon revenue is the most economically efficient means to convey price signals that spur carbon-reducing investment and to distribute tax revenues for reducing other taxes. A carbon revenue will discourage big corporate polluters and stimulate innovation. Also, once America’s entrepreneurs and corporate executives see lucrative opportunities from carbon-saving devices and technologies, they will start investing right away—and in ways that make the most economic sense.

The United States should jump at the chance to adopt a neutral revenue swap. By taxing bad things more, we could tax good things less. Both Democrats and Republicans could support a carbon revenue offset by a payroll or income tax cut. Americans support holding the fossil fuel industry (coal, oil and natural gas) responsible for “all the hidden costs we pay for citizens who get sick from polluted air and water, military costs to maintain our access to foreign oil, and the environmental costs of spills and accidents. A carbon revenue would attach the national security and environmental costs to carbon-based fuels like oil, causing the market to recognize the price of these negative externalities while stopping the US economy from going off the cliff.

Paul Volcker, former chairman of the U.S. Federal Reserve; George Schultz, Secretary of State under Reagan; Robert Shapiro, former Undersecretary of Commerce for Clinton; Conservative economist at the American Enterprise Institute and McCain adviser Kevin Hassett; Bill Bradley, former U.S. Senator; Alan Blinder, former Fed vice-chairman; Gregory Mankiw, former Chair, President’s Council of Economic Advisers and Lawrence Lindsey, former Director of the National Economic Council under George W. Bush; Rex Tillerson, CEO, ExxonMobil, T. Boone Pickens; Paul Anderson, former CEO, Duke Energy and Former American Petroleum Institute Chief Economist Michael Canes can’t all be wrong.

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