Three 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. bills were introduced in Congress in the last week of July. The first, the Climate Action Rebate Act of 2019 (CAR Act), was introduced by Sen. Chris Coons (D-DE) and Sen. Dianne Feinstein (D-CA) in the Senate, and by Rep. Jimmy Panetta (D-CA) in the House. The other two bills, the Stemming Warming and Augmenting Pay Act (SWAP Act) and the Raise Wages, Cut Carbon Act of 2019 (RWCC Act), were introduced by Rep. Francis Rooney (R-FL) and Rep. Dan Lipinski (D-IL) in the House.
The Climate Action Rebate Act of 2019 (CAR Act)
The CAR Act is supposed to reduce carbon dioxide emissions by 55 percent by 2030 and by 100 percent by 2050, compared to 2017 levels. It would impose a 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. of $15 per metric ton of carbon dioxide. This tax would then increase by $15 every year; however, if emission goals were not reached in a given year, the tax would instead increase by $30. The tax would stop increasing after emissions are cut by 10 percent, compared to 2017 levels. This tax would not apply to non-emissive uses of covered fuels, and it would be evaluated upstream (e.g., petroleum would be taxed at the refinery, not at the gas pump). There would also be a tax on fluorinated greenhouse gases, set at 20 percent of the carbon tax rate. This tax would be adjusted for “the global warming potential” of each specific greenhouse gas. The bill would also provide tax refundA tax refund is a reimbursement to taxpayers who have overpaid their taxes, often due to having employers withhold too much from paychecks. The U.S. Treasury estimates that nearly three-fourths of taxpayers are over-withheld, resulting in a tax refund for millions. Overpaying taxes can be viewed as an interest-free loan to the government. On the other hand, approximately one-fifth of taxpayers underwithhold; this can occur if a person works multiple jobs and does not appropriately adjust their W-4 to account for additional income, or if spousal income is not appropriately accounted for on W-4s. s in cases of carbon capture and storage. Finally, there would be a border adjustment: the carbon tax would be levied on relevant imports, while refunds would be issued for corresponding exports.
Seventy percent of the tax revenue would be distributed back to low-income and middle-income Americans, in the form of a monthly dividend. Those with a household income of less than $80,000 (for a single filer) or $130,000 (for joint filers) would receive a full dividend. Those with a household income of between $80,000 and $100,000 (for a single filer) or between $130,000 and $150,000 (for joint filers) would receive a partial dividend, whose value would slowly phase out over that income range. Finally, those with a household income of more than $100,000 (for a single filer) or more than $150,000 (for joint filers) would receive nothing. Children would receive half the amount that adults receive, and this dividend would be taxable but would not count as income for determining eligibility in other federal programs. Of the remaining revenue, 20 percent would be used for various infrastructure programs, including climate adaptation, 5 percent would be used to fund research and development (R&D) by the Department of Energy, and 5 percent would be used to help workers and communities negatively impacted by the transition from fossil fuels.
The Stemming Warming and Augmenting Pay Act (SWAP Act)
The SWAP Act is supposed to reduce carbon dioxide emissions by 42 percent by 2030, compared to 2005 levels, according to projections by Rooney’s office. It would impose a tax of $30 per metric ton of carbon dioxide. This tax would then increase by 5 percent every year, along with an adjustment for 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. . For every two years that emission goals are not met, however, the tax would increase by $3 per ton. This bill would also prevent the government from regulating greenhouse gases under the Clean Air Act for 12 years following the bill’s enactment. Like the CAR Act, the SWAP Act would be levied upstream and include a border adjustment.
Seventy percent of the revenue from this carbon tax would be used to reduce payroll taxA payroll tax is a tax paid on the wages and salaries of employees to finance social insurance programs like Social Security, Medicare, and unemployment insurance. Payroll taxes are social insurance taxes that comprise 24.8 percent of combined federal, state, and local government revenue, the second largest source of that combined tax revenue. es. Specifically, the total payroll tax rate would fall by nearly one percentage point. Ten percent of the revenue would be given to Social Security beneficiaries. Finally, 20 percent of tax revenue would be spent on climate adaptation and resiliency programs, R&D, and state-level block grants intended to help low-income households pay for increased energy prices.
The Raise Wages, Cut Carbon Act of 2019 (RWCC Act)
Finally, the RWCC Act would spend the carbon tax revenue similarly to the SWAP Act. It would impose a tax of $40 per ton of carbon dioxide. This tax would then increase by 2.5 percent every year, along with an adjustment for inflation. This yearly increase would stop once emissions were cut by 20 percent, relative to 2005 levels. Like the other two bills, the SWAP Act would be levied upstream and would include a border adjustment.
Eighty-four percent of the tax revenue would be used to pay for a reduction in the payroll tax. Ten percent of the revenue would be sent to Social Security beneficiaries. Finally, 6 percent of the revenue would go to helping low-income individuals and families. Specifically, 5 percent would go to the Low-Income Home Energy Assistance Program, which helps low-income households pay energy bills, and 1 percent would go to the Weatherization Assistance Program, which renovates the houses of low-income families to make them more energy efficient.
Comparing The Three Bills
Similarities
At a fundamental level, all three bills would tax carbon dioxide emissions, which is a textbook example of 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. . A Pigouvian tax is used to address a negative externalityAn externality, in economics terms, is a side effect or consequence of an activity that is not reflected in the cost of that activity, and not primarily borne by those directly involved in said activity. Externalities can be caused by either production or consumption of a good or service and can be positive or negative. , in which the private cost of a certain market activity (e.g., carbon dioxide emissions) is less than its social cost (e.g., costs of man-made climate change). A negative externality hurts economic efficiency, as the market activity occurs too frequently relative to its economically optimal amount. Taxing this activity at the right amount would make its private cost equal to its social cost, solving the negative externality and maximizing economic efficiency.
All three bills are levied upstream and include a border adjustment. A carbon tax that is levied upstream will likely be simpler than one levied downstream. A border adjustment is useful, because otherwise the tax would potentially encourage producers to shift production overseas. However, a border adjustment would also likely make the carbon tax more complicated.
Differences
There are also significant differences among the bills, however. An obvious one is the difference in the initial carbon tax rate and the annual tax increase. Practically, this difference will mean that the bills will have varying economic impacts and varying impacts on emissions reduction. These differences are likely due to varying empirical estimates for the social cost of carbon dioxide emissions and, more importantly, differing political value considerations (e.g., equity) by policymakers.
Another difference is whether the bill addresses just carbon dioxide or multiple greenhouse gases. On the one hand, focusing on just carbon dioxide allows for a simpler tax regime. On the other hand, taxing just carbon dioxide instead of all (or many) greenhouse gases results in a tax wedgeA tax wedge is the difference between total labor costs to the employer and the corresponding net take-home pay of the employee. It is also an economic term that refers to the economic inefficiency resulting from taxes. between carbon dioxide-intensive activities and other greenhouse gas-intensive activities. This could be economically inefficient, with regards to mitigating climate change, if carbon dioxide-intensive activities are substitutable with other greenhouse gas-intensive activities. This scenario, however, is probably not too likely.
A third difference is whether the bill provides a regulatory break or not. From a theoretical economic standpoint, a properly sized and structured Pigouvian tax should be enough to completely address a negative externality, so there is no theoretical need for further regulations. As such, a bill that includes a regulatory break, like the SWAP Act, could be better for economic growth than other carbon tax bills, while still sufficiently reducing carbon dioxide emissions.
Finally, the most significant difference is what each bill spends most of the carbon tax revenue on. The CAR Act uses most of the revenue to give a dividend to low- and middle-income Americans, while both the SWAP Act and the RWCC Act use most of the revenue to pay for a payroll tax cut. Since poor individuals spend a higher amount of their income on energy, relative to rich individuals, a carbon tax, by itself, would likely be regressive. All three bills would address this regressivity. The dividend would clearly be progressive, since it is only directed towards low- and middle-income Americans. Likewise, since the payroll tax is regressive, reducing the payroll tax would also increase progressivity.
Conclusion
Aside from progressivity concerns, a carbon tax-funded dividend and a carbon tax-payroll tax swap would likely have different economic impacts. Namely, the current tax system in the U.S. is based mostly on income. A carbon tax-payroll tax swap would shift the U.S. tax system towards one based more on consumption. A consumption-based tax code would likely see more economic growth than the current tax code, as savings would be higher. Comparatively, a carbon tax-funded dividend would represent a less drastic shift in the 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. , so the impact on economic growth could be less positive.
Given concerns about man-made climate change, lawmakers will continue to explore different options for introducing a carbon tax. As illustrated by these three new carbon tax bills, however, many different choices need to be made when designing a carbon tax. Ideally, a carbon tax should be as simple, neutral, transparent, and pro-growth as possible, while sufficiently addressing the negative carbon dioxide externality. Policymakers should keep all these factors in mind when creating a carbon tax, as well as any political considerations (e.g., equity) that they may value.
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