Massachusetts Carbon Tax Proposals Just Won’t Cut It

July 10, 2013

In November 2014, Massachusetts voters may have a chance to vote on a revenue-neutral “Carbon Tax Initiative,” which has been glowingly endorsed by the Boston Globe. Additionally, a bill is currently before the Massachusetts state legislature which would establish a revenue-positive carbon tax. While carbon taxes can vary in their exact form, in general they are taxes levied on producers who emit CO2: which mostly means power companies, manufacturing firms, and transportation.

Citing a study performed by Regional Economic Models, Inc, the ballot initiative’s backers at the Committee for a Green Economy, an offshoot of the Citizens Climate Lobby, propose to use revenues collected from the carbon tax to lower several taxes. Half of revenues raised would be put towards lowering Massachusetts’ corporate income tax, a quarter would be used to lower its individual income tax, and a quarter would be used to lower its sales tax. By contrast, the revenue-raising H. 2532 would create a carbon tax which would primarily lower corporate tax rates and increase various income tax credits and exemptions, like the personal exemption and the EITC, and then use remaining revenue to increase spending.

However, a carbon tax faces serious problems. Consumption taxes are only non-distortionary if they are evenly-applied, and, like most excise taxes, carbon taxes can be very uneven. Legal, healthcare, and other services, which already receive preferential taxation due to being exempt from the sales tax, have very low carbon footprints: and thus would be even more preferentially treated under a carbon tax. Meanwhile, manufacturers would suffer as the carbon tax shifted spending away from their more carbon-intensive products.

Furthermore, the people of Massachusetts may suffer if they implement a carbon tax at the state level. The Committee for a Green Economy states that they model their plan off of the carbon tax implemented in British Columbia, but they don’t mention that many of the carbon-intensive industries in British Columbia are industries like mining, natural gas, and oil sands, which are closely tied to the physical jurisdiction of British Columbia. Massachusetts has a very different economy, and its major carbon-intensive industry is manufacturing, which is more mobile. If Massachusetts makes manufacturing substantially more expensive, companies could relocate to neighbors in Connecticut or Rhode Island, rendering the carbon tax useless from an environmental perspective, as well as diminishing any expected increase in revenue.

The bill proposed in the legislature has even more problems. It proposes a formula for reducing the corporate tax rate on a gradual basis, but won’t reduce the income tax rate at all. Rather, it just increases tax credits and exemptions: which only makes the tax code even more distortionary. As interesting as the idea of a “grand bargain” of creating a carbon tax to replace an income tax is, an expansion of tax credits is not real tax reform. Without real, permanent rate cuts, these proposals seem likely to create creeping tax increases and an even more distortionary tax code.

For more on carbon taxes, click here.

For more on Massachusetts, click here.

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