The Most Sensible Tax?
July 5, 2012
We have a new so-called group of “conservatives” here in the US that Ike Eisenhower, Barry Goldwater, and even Ronald Reagan would not be able to recognize. There is among them, apparently, the belief that roads, harbors, airports, militaries, police and fire protection, hospitals, and schools were all created by God on the sixth day, and require no ongoing input from citizens who derive benefits from them.
For those who actually understand how the world works, its a useful exercise to occasionally revisit how best to tax ourselves so as to keep this enterprise of civilized democracy running. One great idea is to tax, and thereby discourage, activities that will destroy the life support systems without which no civilization can survive. Some of our states and provinces, the “laboratories of democracy”, have been working on various versions of the idea, and showing the way.
ON Sunday, the best climate policy in the world got even better: 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 tax 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, a rate that is among the lowest in the Group of 8 wealthy nations. Personal income taxes for people earning less than $119,000 per year are now the lowest in Canada, and there are targeted rebates for low-income and rural households.
The only bad news is that this is the last increase scheduled in British Columbia. In our view, the reason is simple: the province is waiting for the rest of North America to catch up so that its tax system will not become unbalanced or put energy-intensive industries at a competitive disadvantage.
The United States should jump at the chance to adopt a similar revenue-neutral tax swap. It’s an opportunity to reduce existing taxes, clean up the environment and increase personal freedom and energy security.
Let’s start with the economics. Substituting a carbon tax for some of our current taxes — on payroll, on investment, on businesses and on workers — is a no-brainer. Why tax good things when you can tax bad things, like emissions? The idea has support from economists across the political spectrum, from Arthur B. Laffer and N. Gregory Mankiw on the right to Peter Orszag and Joseph E. Stiglitz on the left. That’s because economists know that a carbon tax swap can reduce the economic drag created by our current tax system and increase long-run growth by nudging the economy away from consumption and borrowing and toward saving and investment.
Of course, carbon taxes also lower carbon emissions. Economic theory suggests that putting a price on pollution reduces emissions more affordably and more effectively than any other measure. This conclusion is supported by empirical evidence from previous market-based policies, like those in the 1990 amendments to the Clean Air Act that targeted sulfur dioxide emissions. British Columbia’s carbon tax is only four years old, but preliminary data show that greenhouse gas emissions are down 4.5 percent even as population and gross domestic product have been growing. Sales of motor gasoline have fallen by 2 percent since 2007, compared with a 5 percent increase for Canada as a whole.
A group of Northeastern states in the US has taken a slightly different approach, The Regional Greenhouse Gas Initiative, (RGGI) based on the cap and trade model. A recent study of the economic effects of that effort shows positive trends.
What happened to the dollars? First, RGGI produced $1.6 billion in net present value (NPV) economic value added to the ten-state region.4 The region’s economy – and each state’s as well – benefits from the RGGI program expenditures. When spread across the region’s population, these economic impacts amount to nearly $33 per capita in the region.
This economic benefit reflects the complex ways that RGGI dollars interact with local economies: the states’ use of RGGI auction proceeds on programs leads to more purchases of goods and services in the economy (e.g., engineering services for energy audits, more sales of energy efficiency equipment, labor for installing solar panels, dollars spent to train those installers and educators, and so forth). Together, these dollar flows have direct and indirect multiplier effects locally and regionally.
RGGI has also produced changes in consumers’ overall expenditures on electricity. Although CO2 allowances tend to increase electricity prices in the near term, there is also a lowering of prices over time because the states invested a substantial amount of the allowance proceeds on energy efficiency programs that reduce electricity consumption.6 After the early impacts of small electricity price increases, consumers gain because their overall electricity bills go down as a result of this investment in energy efficiency. All told, electricity consumers overall – households, businesses, government users, and others – enjoy a net gain of nearly $1.1 billion, as their overall electric bills drop over time. This reflects average savings of $25 for residential consumers, $181 for commercial consumers, and $2,493 for industrial consumers over the study period. Consumers of natural gas and heating oil saved another $174 million.