Nowhere is President Biden’s ambitious policy agenda more in conflict than in his triple aim of funding a major infrastructure initiative, attacking climate change, and never raising taxes on households making less than $400,000. He has a terrific opportunity to achieve the first two promises, but he cannot if he sticks to that no new tax pledge.
Last week, my TPC colleague Len Burman blogged about why Biden’s no new taxes pledge is such a bad idea. This week, my colleague Thornton Matheson described how Congress could use energy taxes, such as a carbon tax, to help pay for Biden’s ambitious domestic spending agenda. And The Washington Post recently endorsed a carbon tax to fund Biden’s $2 trillion-plus infrastructure plan. But the president prefers instead to raise taxes on multinational corporations and, perhaps later, on high-income households.
If you polled economists of all ideological persuasions, you’d find overwhelming support for a carbon tax. By taxing “bads” rather than goods, it could significantly reduce carbon emissions and slow climate change. And, depending on how it is designed, it could raise a substantial amount of revenue to pay for clean water, more public transit, and better roads (though the latter may also conflict with his climate change goals).
Here’s the deal
But, as the president himself would say, here’s the deal: No serious carbon tax can exempt roughly 98 percent of households from a tax increase. While the president has made fighting climate change one of his top long-term priorities, he has effectively precluded a carbon tax—arguably the single most effective tool to accomplish this goal.
By itself, a carbon tax would reduce after-tax incomes on all households that use carbon-based goods and services—gas for their vehicles, plastic containers, airplane rides, most electricity. In effect, it would raise taxes on everybody, except those very few who have managed to live completely off the grid.
But such a tax is inherently regressive since low-income households consume a larger share of their income than those with higher incomes. As a result, carbon tax designers have suggested many ways to return some of revenue back to households.
Rebates or dividends
My TPC colleagues Donald Marron and Elaine Maag described two basic models for returning carbon tax revenue in this 2018 paper. As they explain, there are several important distinctions between rebates and carbon dividends. But for now, think about just one: With dividends, everyone gets an equal payment. With rebates, the payments are adjusted based on how a household is burdened by the carbon tax.
The payments could even be means tested so they most benefit people with low incomes. But in any imaginable model, some inevitably would pay more in carbon tax than is returned to them. Many would make less than $400,000. And that would bump head-on into Biden’s no tax pledge.
The pledge also can limit other important uses of carbon tax revenue. For example, another TPC colleague, Adele Morris, has suggested using some of the revenue to support those who work in industries such as coal mining, who would suffer severe economic losses from a carbon tax. These ideas would make the levy more equitable and, perhaps, more politically palatable. But they’d also reduce the amount of revenue that would be available for dividends or rebates, or they’d add to the deficit.
Limited tools
Without a carbon tax, Biden has only limited tools to fight climate change. He could use regulation and executive action—curbs on factories or vehicles that emit carbon dioxide. Government could spend more on clean energy, which Biden proposes in The American Jobs Plan. He also could use tax subsidies to encourage green energy rather than tax increases to discourage pollution: His infrastructure bill includes as much as $400 billion in such tax credits.
But regulation is clumsy, complex, and easily gamed. And we’ve learned from watching presidents Obama, Trump, and Biden that administrative changes can be evanescent. One president puts the curbs on. The next one takes them off. The next one puts them back on. This is, let us say, not optimal when the policy goal is to encourage firms to make costly long-term investments in clean technology.
And green energy tax subsidies are a far less efficient tool than a tax on carbon. Well-intentioned environmental tax subsidies also can be gamed (see conservation easements). And, of course, they lose revenue at a time when we should be thinking about controlling the debt, not adding to it.
It already is apparent that Congress is not going to approve Biden’s entire proposal to raise corporate taxes by $2 trillion over the next 15 years. And nobody is suggesting that a carbon tax would be an easy lift among lawmakers who fear even raising the gas tax by a few cents a gallon. Yet, Biden should not allow a misbegotten promise to block an effective weapon in his war on climate change.