New Analysis: Finding an Eventual Path to a Carbon Tax
Marie Sapirie | Tax Notes
“‘I’m an advocate of a revenue-neutral carbon tax if the revenue raised is used to reduce or eliminate taxes that are most harmful to the economy,’ said Alex Brill of the American Enterprise Institute. ‘That would be a great trade,’ he said before adding that it is not something that is about to happen. ‘As a matter of politics, the environment for a carbon tax has not matured to the point that a majority of lawmakers are ready to embrace it,’ Brill said. ‘It would be premature for those who think a carbon tax is a good idea to try to chase the next legislative train,’ he said. And while there is a risk of trying to rush a carbon tax into the political process, there is also a risk in believing that a carbon tax is always going to be a long-term project, he added. ‘This needs to happen in the medium term. . . . Hopefully within the next four to six years.’ . . . Brill said that, in terms of deregulation, ‘lawmakers will have to think carefully about which regs are no longer necessary if a carbon tax is in place, but there is a great opportunity for deregulation.’ He pointed to the corporate average fuel economy standards as one potential candidate for elimination. And although the behavior of future Environmental Protection Agency regulators cannot be guaranteed, if carbon emissions go down, regulators will have less motivation to reimpose regulatory emissions restrictions, he noted.
Whether a border adjustment should be a component of a carbon tax is a question that requires further thought, Brill said. ‘It depends on how high the tax rate is. If the carbon tax is high, then a border adjustment is more important to consider,’ he said, adding that the United States has other policies that impose costs on domestic production but that are not border-adjusted, such as the minimum wage.
Pursuing climate policy through the tax system has traditionally made conservatives and IRS administrators uneasy. However, the IRS already administers a host of energy-related tax provisions that could be repealed, Brill noted. ‘A straightforward, comprehensive carbon tax would reduce the IRS’s burden relative to the dozens of existing energy-related tax provisions,’ he said. . . . Individuals could also see some simplifications as a result of a carbon tax. Imposing a tax on emitters would eliminate the need for individual provisions promoting alternative energy sources and would therefore simplify the process of filing tax returns for individuals, Brill said.
Setting the tax rate for a carbon tax is a challenge, Brill acknowledged. ‘The tax rate on carbon should not be zero; it should be positive,’ he said. There are different suggested rates for a carbon tax, as well as different possible increases over time. ‘We should proceed cautiously with setting a rate,’ Brill said. That includes giving taxpayers time to adjust to the new tax, and hopefully make adjustments in their emissions, he added.”