Global warming and new tax ideas

Congressman Dingell has certainly caught attention with his call for addressing global warming by increasing the gas tax and denying a home mortgage deduction for homes larger than 3000 square feet (referred to by some in the press as "McMansions"). There are articles in the LA Times (8-30-07) and Washington Post.

Are these crazy ideas?

Not really, although it sounds like some refinement is needed. And Dingell's bill has not yet been introduced so details are still to come. A few observations:

1. Polluter pay approaches to taxes or fees make economic sense. If you cause pollution and don't have to pay for it, the costs of it and its eventual cleanup are borne by everyone. The challenge is in designing the tax or fee to address the polluting behavior. Denying a mortgage interest deduction for a home greater than 3000 square feet isn't targeted and so is problematic:

a. the home may be completely powered with renewable energy that doesn't emit greenhouse gases
b. it may be built tall rather than all on ground level so isn't taking 3000+ square feet of land that could be used for something else, like planting trees
c. the number of occupants of any size house may be another measure of energy use
d. the homeowner may have little or no debt on the house, energize it with fuel that produces lots of greenhouse gas emissions and so has no penalty for doing so since there is little or no mortgage interest deduction to deny

A better approach may be to add a carbon tax onto utility bills that exceed what a bill should be for a average size home with 4 occupants (assuming the energy for the home is of a type that produces greenhouse gases, rather than being from nuclear or renewable energy).

btw - assuming the over 3000 square foot home is expensive, there are reasons of equity and fairness that justify reducing the mortgage interest deduction. See my op ed from the San Jose Mercury News for brief overview of why.


2. The current gasoline excise tax is designed to raise funds for road maintenance and building, not to address pollution. A gasoline tax should be a good polluter pays taxes for several reasons including:
a. a system already exists to collect such a tax (it just needs to be separated into a different fund than the road maintenance fund)
b. oil is a fossil fuel and burning gasoline creates greenhouse gases
c. higher gasoline taxes are used outside of the US, such as in Europe and they drive much smaller cars there so it seems to be effective to use high gasoline taxes to reduce driving

It will be interesting to see the actual bill introduced. Whether or not it gets any serious legislative attention this year doesn't really matter as it is likely to lead to discussions and greater public awareness of polluter pays tax ideas, how to address global warming, and possible remedies.

What do you think?

Global warming and our tax laws

H.R. 2776 passed by the House on 8/4/07 would provide a variety of incentives for alternative energy, paid for with reduced tax breaks for the oil industry. It also calls for a "carbon audit of the tax code."

Treasury would work with the National Academy of Sciences to conduct a "comprehensive" review of the tax law to "identify the types of and specific tax provisions that have the largest effects on carbon and other greenhouse gas emissions and to estimate the magnitude of those effects." They would have 2 years to complete the report.

Should this provision become law or someone decides to do such a report anyway, what might they find? Here are some possibilities:

1. Allowance of mileage for business travel. Almost all of this is likely done in vehicles that produce carbon emissions. Perhaps deductions should only be allowed for travel in vehicles that use alternative energy sources that produce little or no carbon emissions. Or perhaps travel deductions should be reduced by a specified percentage if done in vehicles that emit CO2.


2. Expenses of air travel. This produces lots of CO2 and nitrous oxide. These expenses could be disallowed or only partially allowed so the tax law doesn't encourage air travel.

3. Favorable provisions for the oil industry such as percentage depletion. These could be eliminated to reduce GHG emissions.

And there are certainly many more.

What do you think?

Wanting Your Cake and Eating It Too

On August 9, 2007, President Bush noted that he'd be ok with reducing corporate income taxes and simplifying the tax law. On that same day, he signed H.R. 2272 - America COMPETES Act and called for Congress to finish the work and make the R&D tax credit permanent.

He is not alone in this tendency to call for simplification and lower rates, while also calling for new tax breaks. In his remarks about corporate tax rates he observed that "it's much easier to get something in the code than get it out of the code." A very true statement!

http://www.whitehouse.gov/news/releases/2007/08/20070809-1.html

http://www.whitehouse.gov/news/releases/2007/08/20070809-6.html

So, how do we simplify when we also want to use the tax law to solve all kinds of problems from health insurance to encouraging innovation?

Comments?

How about a Carbon Tax in California?

While global warming has been a problem for quite some time, it is getting heightened attention today, particularly in California which now has a goal to reduce greenhouse gas (GHG) emissions by 25% by 2020. That's ambitious. How can that goal be acheived?

There are a few different techniques for resolving environmental problems.

1. “Command and Control” - enacting laws to require action with some type of penalty imposed for failure to comply. This is the "stick" approach.
2. Incentives - the “carrot” approach to entice people to do something or not do something.
3. Market-Based Approaches - allows economic principles, such as supply and demand, to prevail. These techniques let the polluter decide the best way to meet an environmental goal. Examples include a tax on the use of plastic shopping bags, the gas guzzler tax, and a system of trading pollution rights. Market-based approaches provide incentives, but also mandates. For example, while a tax on plastic shopping bags will lead to a better consideration of the true cost of using such bags, it is also a mandate because if the bags are used, the tax must be paid.
4. Education and Information – providing more and better information to people so that they may be more likely to do the “right thing.”
5. Personal and Corporate Values - Individuals and businesses may decide to act and behave in ways that protect the environment because they believe it is the right thing to do. Businesses may adopt some type of code of social responsibility that affects their purchasing, hiring and other decisions. Similarly, individuals may decide to follow a specific course of action because of a strong belief in something or a concern over something.
6. Development and Use of New Technologies - to eliminate or significantly reduce a problem. This technique should benefit the economy.
   

Taxes are a market-based incentive because they affect pricing. For example, a few years ago, Ireland imposed a tax on plastic shopping bags in order to reduce the waste they create. This tax is reported to have led to a 90% drop in the use of plastic bags.

When something is taxed, people tend to want less of it. A tax should also help people see that there are costs associated with using an item and make them pay for it.

What would the government do with the funds from an environmental tax? Possibilities include:

1. Reduce some other tax (a "tax shift").
2. Provide information to the public on how to reduce greenhouse gas emissions.
3. Fund research to help produce better technologies that result in fewer greenhouse gases.
4. Clean up the environment.
5. Some combination of these options.

Taxes can be used to help California reach its emission reduction target. The biggest contributor to global warming are carbon emissions, such as are generated by burning coal and oil. An energy tax could be imposed on energy produced from these sources as a way to encourage people to reduce their energy consumption or shift to energy sources that do not produce greenhouse gases. The gasoline tax could be increased as well.

Or, a tax could be imposed on vehicles that get less than a certain mpg. It could be simple by just adding it to the annual vehicle registration fee.

Carbon taxes are not new. Sweden, Finland, and a few other European countries have had them for years. There is even one in the US because citizens of the city of Boulder, Colorado passed one into law in November 2006.

Governor Schwarzenegger says he wants to use market-based incentives to reach the emission reduction target. Environmental taxes should be considered in this effort.

What do you think?

More information:
http://gov.ca.gov/index.php?/press-release/4111/

http://news.bbc.co.uk/1/hi/world/europe/2205419.stm

http://www.bouldercolorado.gov/index.php?option=com_content&task=view&id=6136&Itemid=169

http://www.carbontax.org/