Originally published on Forbes.com Nov 17th, 2012
I first learned about the concept of a carbon tax from the Green Party Platform. It was one of the things that Presidential candidate Jill Stein spoke at length about in my interview with her.
The concept also has Republican support. Former Congressman Bob Inglis has also been promoting the idea
The logic is the same in both cases. The carbon tax would cause the negative effects of emissions to be priced into products. The resulting revenue would somehow be rebated or used to reduce another tax. The idea seems to be gaining more traction. The Congressional Budget Office has just released a working paper evaluating the various ways that the effect of the carbon tax on low-income families might be offset.
CBO estimates that a carbon tax that yielded $103 per ton of carbon released would cost the average low-income family (lowest 20%) about $425 per year. Top 20% families would end up paying $1,380 per year. This is on the regressive side since it would represent 2.5% of the after-tax income of lower income families and less than 1% of the income of higher income families. CBO considered two types of rebate schemes
The first type includes options that would direct some carbon tax revenue back to households in a manner that would benefit households in all income brackets, not just those at the lower end of the income distribution. Such possibilities include using carbon tax revenue to:
Reduce income tax rates,
Provide income tax rebates,
Provide payroll tax rebates, and
Increase incentives for energy-saving investments.
The second type includes options that would specifically target low-income households. Those options include using carbon tax revenue to:
Increase Earned Income Tax Credit (EITC) payments,
Provide an additional fixed payment to households that are eligible for SNAP payments, and
Increase payments made to households through the existing Low Income Home Energy Assistance Program (LIHEAP).No single option performs best according to all of the criteria; trade-offs are inevitable. For example, some researchers find that the economy-wide cost of a carbon tax would be considerably lower if the revenue were used to reduce marginal tax rates on labor, capital, or personal income than if it were used to offset costs imposed on low-income households. Reductions in marginal tax rates would help offset the disincentives to work and to invest that a carbon tax would otherwise create; however, they would provide larger relief (measured as a share of income) to higher income households than to lower income households. In general, options that would most effectively provide direct compensation to low-income households tend to be less effective at increasing households’ incentives to work and to invest. Policymakers would not, of course, be limited to one form of compensation but could combine different options.
I have a little trouble seeing how eight bucks a week or so will have much of an effect on people’s decisions as to whether to work or not. Nonetheless, that was one of the criteria that they were using. The bottom line of the CBO analysis of the various rebate options of the carbon tax is that those that are best targeted toward offsetting the regressiveness of the tax are the ones most likely to create some economic distortion and have the highest administrative costs. For example expanding LIHEAP (Low Income Home Energy Assistance Program) would be very targeted, but has downsides:
Providing assistance for carbon-tax-induced increases in energy bills to all low- and moderate-income households would require a major expansion of the program, a substantial increase in administrative costs, and possibly a major overhaul of the program. The current program is funded as a block grant from the federal government to the states and other entities, leaving wide latitude in the types of assistance provided.
Increasing LIHEAP subsidies could raise the overall cost of achieving any given level of emission reductions, because it would somewhat offset the price signals necessary to motivate households to undertake low-cost reductions. Further, LIHEAP subsidies would not provide any additional incentives for households to work and invest.
I think the most important thing about the report is that it shows that the carbon tax is a live proposal getting serious consideration.
You can follow me on twitter @peterreillycpa.