Yesterday I was asked to write a comment on the debate over initiative I-732 in Washington State which would establish a revenue-neutral carbon tax, and I wrote several paragraphs. Today, after sleeping on it, I realize there is a simple point to be made.
Here’s the background: The Washington initiative is loosely modeled on British Columbia’s carbon tax. It would cover about 3/4 of the economy, taxing carbon at $25/ton. Revenues would be offset by eliminating the main business tax, shaving the state sales tax by a point, and increasing low income tax rebates. A group, Carbon Washington, was formed to promote it. Meanwhile, another group, the Alliance for Jobs and Clean Energy, bringing together unions, social justice activists and more militant environmentalists, has publicly opposed the initiative. They demand that revenues be funneled into social service programs and public investment. The rhetoric has been heated; I attended a talk the other day in which supporters of I-732 were described as racists.
I have serious problems with the Alliance position, but I’ll put that aside for now. Let’s talk about this “revenue neutral” thing. Why would someone want a carbon tax to be revenue neutral, especially in a state with serious fiscal constraints like Washington? I can think of two reasons. First, it telegraphs to conservatives that there is nothing “big government” about the proposal: you can vote for the initiative while swearing on a stack of Road to Serfdom’s. Second, it’s what results when you rebate the money. The publicity of Carbon Washington has trumpeted both of these.
The first argument is a loser. (1) The number of conservatives who believe climate change is a serious problem that requires government action but will only support a proposal if it leaves the size of government precisely unchanged is vanishingly small. This is a political concession without an upside. (2) Meanwhile, by catering to the small government crowd, Carbon Washington has deeply alienated almost the entire left side of the political spectrum—the natural base for a vibrant climate movement. Using carbon money to eliminate a business tax doesn’t help matters, and the formula used for tax offsets opens the door to the possibility that the system will be revenue negative in some years.
The second argument gets it backward. It’s true that rebating the carbon money will result in revenue neutrality (or something close to it), but it’s the rebate, not the neutrality, that matters. Putting a price on carbon, whether through taxes or auctioned permits, transfers money from the pockets of consumers to the government. This is regressive, since it’s effectively a sales tax, one that low income people can hardly avoid. But rebating the money is a second transfer, from the government back to the people. The point of a well-designed rebate, like an equal per capita dividend, is that the combined system with both transfers is progressive, contributing to greater equality at a time when equality is in very short supply. From a political perspective, you want to be able to argue this. Revenue neutrality is only a means toward this end; why would you make that your selling point? Lots of government handout schemes could be revenue neutral, but what people presumably care about is whether the overall revenue system is fair.
Conclusion: drop this revenue neutrality nonsense. Propose carbon pricing systems that promote equality. Don’t take the side of the ideological enemies of public action. Return carbon money for social justice, not because there is some intrinsic value in keeping revenues just where they are.