A recent report from the Organisation for Economic Co-operation and Development (OECD) on 2020 taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. reforms reveals an increase in the number of environmentally-related tax policies when compared to 2019. Reforms were concentrated in a limited number of countries and their scope continued to be narrow. Gas taxA gas tax is commonly used to describe the variety of taxes levied on gasoline at both the federal and state levels, to provide funds for highway repair and maintenance, as well as for other government infrastructure projects. These taxes are levied in a few ways, including per-gallon excise taxes, excise taxes imposed on wholesalers, and general sales taxes that apply to the purchase of gasoline. es, carbon taxA carbon tax is levied on the carbon content of fossil fuels. The term can also refer to taxing other types of greenhouse gas emissions, such as methane. A carbon tax puts a price on those emissions to encourage consumers, businesses, and governments to produce less of them. es, and taxes on electricity consumption have all been part of reform efforts. Environmentally-related taxes are taxes on energy use, motor vehicle taxes and other taxes on transport, and taxes on waste and plastic.
Environmentally-related taxes, on average, account for only 6.7 percent of total tax revenue among OECD countries. This is a smaller share of revenue than corporate, individual, or social insurance taxes but more than property taxA property tax is primarily levied on immovable property like land and buildings, as well as on tangible personal property that is movable, like vehicles and equipment. Property taxes are the single largest source of state and local revenue in the U.S. and help fund schools, roads, police, and other services. es or other taxes.
In 2017, environmentally-related taxes raised revenue equal to 2.3 percent of Gross Domestic Product (GDP), relatively smaller than the 2.4 percentage points raised in 2000 and 2010. However, revenues from environmentally-related taxes differ significantly across countries, varying from 0.7 percent of GDP in the United States to 4.5 percent of GDP in Slovenia. Over the past 17 years, environmental tax revenue as a share of GDP fell in 21 countries, remained stable in eight, and increased in 11 countries.
Energy use taxes, like fuel excise and carbon taxes, represented 72 percent of the environmentally-related tax revenues, making energy use taxes the main drivers of change in revenue from environmentally-related taxes as a percentage of GDP. According to the OECD report, this is because, in the long run, high energy tax rates may alter taxpayers’ behavior and result in a decrease in fuel demand, reducing tax baseThe tax base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority. A narrow tax base is non-neutral and inefficient. A broad tax base reduces tax administration costs and allows more revenue to be raised at lower rates. s and, potentially, revenue.
As countries reform their environmentally-related taxes, they should take into consideration the impact on taxpayers’ behavior and that the tax hikes will not necessarily translate into more revenue, especially when the economies are struggling to recover from the COVID-19 pandemic. Countries shouldn’t miss the opportunity to implement comprehensive gas tax reforms that take into account both fuel consumption and contaminant emissions, or implement taxes levied on distances driven. At the same time, policymakers should limit tax exemptionA tax exemption excludes certain income, revenue, or even taxpayers from tax altogether. For example, nonprofits that fulfill certain requirements are granted tax-exempt status by the IRS, preventing them from having to pay income tax. s and preferential tax treatment for certain types of vehicles as that might translate into a program that primarily benefits those who can afford to purchase electric vehicles. Additionally, preferential tax treatment could encourage others to change cars more often. Last, but not least, the report points out the pronounced differences between taxation of transport and non-transport emissions. The effective tax rate differences between diesel (with nearly a €95.5 per ton of CO2 effective tax rate) and off-road fuel oil (with an effective tax rate of €1.5 per ton of CO2) could be addressed. Non-transport carbon emissions remain largely untaxed while accounting for 85 percent of energy-related CO2 emissions.
As policymakers are eyeing environmental taxes as a Pigouvian taxA Pigouvian tax, named after 1920 British economist Arthur C. Pigou, is a tax on a market transaction that creates a negative externality, or an additional cost, borne by individuals not directly involved in the transaction. Examples include tobacco taxes, sugar taxes, and carbon taxes. and secure form of raising revenue shouldn’t disregard the principle of neutrality under which they do not to favor or punish specific industries or products.
In 2020 six countries raised fuel taxes. Latvia increased gasoline taxes by 7 percent and diesel by 11 percent, while Lithuania raised both by 7 percent. Finland elevated the tax on transport fuels to offset the effect of inflationInflation is when the general price of goods and services increases across the economy, reducing the purchasing power of a currency and the value of certain assets. The same paycheck covers less goods, services, and bills. It is sometimes referred to as a “hidden tax,” as it leaves taxpayers less well-off due to higher costs and “bracket creep,” while increasing the government’s spending power. by 2023. South Africa also made a partial inflation adjustment for 2020, keeping the increase slightly under the inflation rate. France is gradually reducing the preferential tax treatment for diesel used in public works while Sweden eliminated diesel tax exemptions in mining activities.
Three countries increased carbon taxes. In 2020, in South Africa, a carbon tax of €7.42 (US $8.62) per ton of CO2 was implemented. Sweden raised carbon and energy taxes on fossil fuel used for heating, and Ireland increased the carbon tax rate from €20 ($23.24) to €26 ($30.22) per ton of CO2. The Netherlands is also planning to raise carbon tax rates in the coming years.
Two countries increased electricity taxes for businesses. Ireland raised the electricity tax rate for businesses, and the Netherlands increased the surcharge tax for higher energy consumption brackets, shifting the burden from households to businesses. At the same time, it cut the energy tax rate for household consumption under 10,000 kWh per year. Poland reduced the electricity tax from PLN 20 ($5.10) to PLN 5 ($1.28) per MWh, and the United States prolonged tax creditA tax credit is a provision that reduces a taxpayer’s final tax bill, dollar-for-dollar. A tax credit differs from deductions and exemptions, which reduce taxable income, rather than the taxpayer’s tax bill directly. s and incentives for bio and alternative fuels.
In order to more accurately tax the environmental impact of diesel vehicles, Ireland substituted the 1 percent surcharge on diesel vehicle registration with a nitrogen oxide-based surcharge. To encourage the purchase of new and less polluting vehicles, Lithuania introduced a new pollution tax for cars registered or reregistered starting with July 1, 2020, and Turkey reduced the special consumption taxA consumption tax is typically levied on the purchase of goods or services and is paid directly or indirectly by the consumer in the form of retail sales taxes, excise taxes, tariffs, value-added taxes (VAT), or an income tax where all savings is tax-deductible. rate for motor vehicles. Poland reduced the tax rate for hybrid vehicles as of January 1, 2020, while Israel, announced it will gradually reduce the preferential tax treatment for hybrid and electric vehicles. Ireland prolonged the registration tax relief for hybrid vehicles to the end of 2020 and the Netherlands did the same through 2024 for zero-emissions vehicles.
The Netherlands also eliminated the tax registration refund for taxis and reformed the vehicle tax to account for the new Worldwide Harmonized Light Vehicle Test Procedure (WLTP) that measures fuel consumption and contaminant emissions. The Netherlands also intends to tax airline tickets from 2021, and Germany was planning, before the COVID-19 pandemic, to increase the aviation tax rates on all distance bands. This will be in addition to the European Union Emission Trading System that only applies within the European Economic Area until 2023.
Sweden approved new taxes on plastic bags and waste incineration and Iceland introduced a tax of ISK 2,500 ($18) per ton of fluorinated greenhouse emissions, an amount that will double in the next year of its implementation. Denmark increased taxes on shopping bags and disposable tableware. Latvia raised the tax rate on natural resources like sand. Italy also approved a new consumption tax on plastic packaging but postponed its implementation for six months until January 2021 due to the COVID-19 pandemic.
Poland is, again, the only country to reduce environmental taxes and burdens on businesses by cutting the tax rate on the extraction of silver and copper by 15 percent.
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