Here’s a riddle: If Congress doesn’t want to raise income tax rates but wants to raise revenue, what can it do?
One answer: Pass a carbon tax.
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A relatively moderate-sized carbon tax could raise $1.25 trillion over the next decade, a huge chunk of the money needed to bring the federal budget deficit under control. And the idea is getting a closer look now that the election is over and the “fiscal cliff” is looming.
Because it would tax fossil fuel use, the carbon tax pleases economists who want to encourage investment and discourage consumption. Climate activists hope it would reduce greenhouse-gas emissions by penalizing the use of coal, oil and natural gas. And for lawmakers opposed to any change in tax rates or deep cuts in spending, the carbon tax could be a lifeline.
“In the general scheme of things, taxes discourage whatever you’re taxing,” said William Pizer, associate professor of economic and environmental policy at Duke University. “If something is discouraged, it might as well be something bad like pollution instead of employment and savings.”
Pizer said that a $20-a-ton tax on carbon dioxide would raise gasoline prices by about 20 cents per gallon and boost electric bills slightly. It could be most efficiently collected “upstream,” at coal mines, oil and gas wells, or terminals for oil tankers arriving at U.S. shores.
There are drawbacks. Higher prices fall most heavily on lower-income earners who spend a larger portion of their pay on fuel. The tax would hurt certain regions more than others. It would need to be tweaked to protect firms that export to countries where companies don’t pay any carbon tax. It would also have to be reconciled with existing carbon trading schemes in the Northeast and California.
“Taxation is a painful thing, but this is one of the least inefficient ways of raising taxes,” said Nick Robins, head of the climate change center for banking giant HSBC. “At a time of low economic growth, it can be quite a good thing because it is taking costs out of the economy. If you can do that, it would be a good thing.”
As a matter of negotiating strategy, now might be a bad time for the Obama administration to advertise interest in a carbon tax. Doing so would make it a “lightning rod,” said Pizer, a former Treasury official. But, he added, once people see the pros and cons of other taxes and once they reach an impasse and need more revenues, a carbon tax might be an attractive alternative.
“From a policy-making point of view, it is clear that there is no way that this Congress is going to glom onto a carbon tax as an environmental policy,” said Philip R. Sharp, who served two decades in the House and is now president of Resources for the Future. “But it could become an important enabler for other things the Congress wants to do, namely eliminating the deficit and tax reform.”
In the past, conservatives have supported the idea of a carbon tax, though most of them have opposed using the receipts to swell government coffers.
N. Gregory Mankiw — a Harvard University economics professor, adviser to GOP presidential nominee Mitt Romney and former chairman of President George W. Bush’s Council of Economic Advisers — has long supported a carbon tax because he says the price of fossil fuels doesn’t reflect their true societal costs. In the past, he said he would use the receipts to lower other taxes.
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