26 april 2013

Carbon Tax on the Table in the Senate

Stephen Stromberg, Washington Post, April 25, 2013

For years it’s been obvious in policy-wonk circles that a carbon tax is a great idea. But it’s been even more obvious that the policy is politically toxic. Yet — and I almost don’t want to point this out, in case publicizing it prompts lawmakers to run away as fast as they can — taxing carbon and some other excellent ideas that have been under-appreciated in Washington are now officially on the table in the Senate Finance Committee.

Sen. Max Baucus (D-Mont.), one of the most powerful Democrats on Capitol Hill, announced this week that he wouldn’t seek another term, devoting the rest of his time in Washington to reforming the tax code. Even before Baucus’s announcement, he and the Finance Committee’s senior Republican, Sen. Orrin Hatch (Utah), had asked their staffs to draw up some tax reform options for the committee to consider. On Thursday, the staffs released a package of ideas that would involve reforming the tax code for infrastructure, energy and natural resources.

One proposal is to “eliminate most or all existing tax expenditures for the energy sector” — there are an annual $16 billion worth of tax credits, deductions and other spending posing as tax policy — and replace that tangled web of provisions with “a new federal excise tax on the sale or importation of fossil fuels” based on their carbon content. Not only would this make the tax code a lot simpler, save the government money and get rid of some very wasteful energy programs that should insult every taxpayer. The policy would also raise tax revenue and fight climate change in an economically rational way.

True, the report notes, some worry about “the potential impact of such taxes on economic growth and jobs.” But one of the policy’s many virtues is that lawmakers can design away its few drawbacks. “The revenue raised by such a tax,” the Finance analysis points out, “could be used to reduce other taxes or to make public investments.” Replacing inefficient taxes that tax things you want — income, payroll or corporate, maybe — with efficient ones that tax things you don’t — like a carbon tax — is exactly the sort of reform that Baucus’s tax program should be about. Some of the resulting revenue could also be rebated so that higher energy prices don’t have a large impact on Americans — especially poorer Americans.

The Brookings Institution’s Adele Morris calculated earlier this year that by setting a small charge on carbon, Congress could lower the corporate tax rate by 7 points, cut deficits by $815 billion over two decades and leave the bottom 20 or 30 percent of Americans unaffected by the tax, all while cutting emissions by double-digits. Lawmakers should aim to be even more ambitious than that.

Is the Finance Committee’s report a sign that Baucus will try to end his Senate career in a blaze of policy rationality? Maybe not. His record to now doesn’t suggest he’d embrace a plain carbon tax. The document explicitly states that neither the chairman nor the ranking member endorses any specific proposal in its list of options. It includes some other heretical ideas, such as a tax on how many miles cars travel, which is the economically obvious way to pay for road construction but probably even more controversial than a carbon tax. And the report contains some very bad ideas — like not raising any more money for infrastructure at all.

Yet if Baucus wants a really admirable tax-reform legacy, he should be trying to cut a deal on taxing carbon, one of the best opportunities to make the tax code elegant instead of ungainly. He should be asking Republicans which taxes they’d want cut in return. He should be asking Democrats how they’d like to distribute some of the revenue to low-income Americans, making sure the tax doesn’t hurt them.

And if that’s not his plan, he should be asking himself why not.

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