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.
11 comments:
Excellent response to a regressive action on the part of lazy lawmakers; the only economic reason is to give an illusion of effort to over-lobbied legislators.
Find Carbon WA and Alliance's progenitors and find the source of such fiscal irresponsibility and malfeasance.
Exactly. "Revenue neutral" is like "empowerment." It has a nice sound to it as long as you don't ask what it actually means. The triangulators have been at it so long, they no longer pay attention to whether their concessions to conservatism have any political traction. Concession has become a reflex.
Social justice needs to become carbon neutral.
Sorry, I meant 'carbon negative'.
I'm really surprised that you fail to understand the point of rebating the carbon (or GHG) pollution tax, which has nothing to do with catering to the anti-tax crowd. calling it a tax rather than a tax reform or shift is already a huge rhetorical mistake). The point of rebating the revenue is that the aim is simply to increase the relative price of carbon emitting sources, and thereby encourage conservation, efficiency and switching to renewables amongst myriad point source users in households and SMEs. (While you're at it, stripping away fossil fuel subsidies and getting rid of the god-awful corn ethanol mandate, which is both an environmental and humanitarian atrocity, would be complementary policies). Insofar as variously people do so, they will experience extra money in their pockets from the savings they enact, which can be used for other expenses, which is not just a stock but a carrot as well. In turn, provided there is a steady schedule of guaranteed annual increases, investment decisions, which tend to have a long lead time, will already respond to demand reductions and renewable demand increases well before hand. (The tax should start low and be increased by increments annually to avoid economic disruptions and provide certainty. But they should be increased up to the point, that combined with other measures, they get the job done. A low carbon price won't do, and pretending that we know the exact level of sensitivity of emissions beforehand is a fool's errand, though Lord Stern put the price at $80/ton already in 2008 and the longer the delay the higher the price would to be.) But getting the tax-and-rebate scheme enacted is actually the hard part. Once in place, any effort to repeal the rebates would be experienced by the broad population as a tax increase. ANd, of course, there should be a progressive tilt to the rebate scheme to insulate the poorer quarter of the population from the price increases, when they lack the means to respond to positive incentives. But the aim of the scheme is to reduce and eliminate emissions, not to effect redistribution, and most of the rebate should go to the middling sorts who would be in a position to do so. (If you want redistribution,- and why not?- you use a different policy implement).
(Cont.) Of course, there should be know pretense that simply putting a price on carbon/GHG emissions would do the trick and the magic of the market would take care of the rest, which is just higher superstition. We're talking about a massive systematic transformation of capital stocks and infrastructure on both the production and consumption/usage sides to be accomplished with a single generation- or else. Many other measures would need to be taken, including massive public investment and publicly guided indicative industrial policy. (For one thing, utilities will need to be nationalized, both in the sense of a single unified electrical grid, which will need to be upgraded, and secured, especially if land transport os to be entirely electrified, and in the sense that they should all be publicly owned, though at the state or municipal level, as witness the obstructive role they ate currently playing against renewables). But a tax-and-rebate scheme is an essential necessary measure, if not sufficient. For one thing, it would bring the broad mass of the population into the issue, as effecting their pockets, regardless of how informed and concerned they are about AGW. The most logical system for rebates on a national U.S. level would be the Social Security tax-and-transfer system, which effects the vast majority of the population, with add-ons extended from there to reach the entire population proportionately. It's hard to imagine that people would resent a reduction of SS taxes for the sake of climate policy as an oppressive imposition. By contrast, retaining such revenues for public investment purposes and projects is both unnecessary, (since public fiscal resources are ample, including debt monetization if necessary), and precisely an example of top-down elitist "reformism", which provokes so much confusion and often justified resentment among the bottom 90%. Nut the other key point is that a national tax would have to be imposed on imports, (which is legal under WTO rules), otherwise it would be economically insane. But imposing the tax on $3 tn worth of imports, about 4% of global GDP, would have a huge impact on other countries climate policies.
JCH: What gives you the impression I don't know the purpose of pricing carbon or rebating the revenues?
Er, because you spend your post on dubious rhetorico-political analysis, arguing that "revenue neutral" is merely a concession to the conservative anti-tax small government crowd, when, in fact, "revenue neutral" simply means fully rebated, and the functional reasons for doing so are cogent. The only real question is how to align the tax incidence with the rebate incidence, since except for some progressive tilt buffering the poorer portion of the population who are most vulnerable to the price rise and least able to take corrective measures, the incentive effects should be distributed according to the level if carbon-emissions use and the ability to reduce it.
I know you think that a cap-n-trade system is preferable, but I think you have the political economy of that issue , rather than the narrow formal economics, all wrong. Likewise the idea that a tax and the state level should be withheld and be used to fund worthy environmental projects is even worse, precisely feeding into anti-elitist resentments. It's only the federal government that has the fiscal capacity to do so. (A targeted credit policy on a state level to lower the financing costs of switching to renewables, since they generally have high upfront costs and low marginal and maintenance costs, in contrast to fossil fuel infrastructure, so the financing costs determine their feasibility and rate of conversion, would be a useful supplement to a carbon tax, within the cyclical balanced budget constraint that states all face).
Here in VT the current proposal is for a $10 fossil fuel tax and rebate rising annually $10 a year to reach $100/ton. Half the revenue goes to reducing sales tax, another portion goes to reducing employment tax on a per head basis and the rest goes to reducing income taxes, with a prebate refund for low income people. (You obviously want to include SMEs since they too are prime users/consumers of energy). It's imposed on fossil fuel distributors, since the state has no local sources of fossils fuels and excludes electricity because that is already covered by other regulations on the NE grid. It amounts to a limited fee-and dividend scheme, rather than a full-fledged GHG tax, (which might just prove to be too administratively complex to enforce, so regulatory scheme and fines for excess emissions would have to complement any feasible tax). But the reason for pursuing such schemes on the state level is that the federal levle is so grid-locked and dysfunctional that a states-first approach is the only current avenue, with the clear awareness that a national tax-and-rebate is the required goal. Sneering at the hoi polloi from the standpoint of technocratic policy isn't helpful.
Weird reaction. This post is largely about the political rhetoric of "revenue neutral", not the advisability of returning the revenues. I'm trying to understand why the ad campaign for I-732 in WA, which emphasizes revenue neutrality, has been such a dud.
I'm not familiar with the WA state campaign, but you didn't clearly mark the focus of your post. However, I find your theoristic detachment and perhaps only distant engagement weird. What ever happened to the "philosophy of praxis"? I find it missing even among Marxian economists, who mostly want to prove themselves theoretically "correct".
Peter, thank you for your thoughts on this. The I-732 campaign is motivated by our moral obligation to act on climate change, and doing so in a way that makes our tax system fairer and more sustainable. This is accomplished in large part by lowering the state sales tax and funding a Working Families Rebate for low-income households. While I-732 is designed to be revenue neutral, we are NOT focused on revenue-neutrality as a selling point (for the reasons you correctly point out). Passage of I-732 will be the biggest equity improvement to the state tax system since the 1977 ballot measure that eliminated the sales tax on grocery store food! And it will be an important first step in our race against climate change and delivering on our responsibility to leave our children and future generations a cleaner, healthier, safer world.
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