Green Taxation

The 110th Congress has proposed many bills that use the tax law to encourage some type of "green" behavior, such as replacing a car with a more fuel efficient one. There are also a few proposals that use the tax law to punish behavior that harms the environment, such as to increase the gasoline excise tax.

While it might seem simple to design a tax credit to encourage a homeowner to install a solar roof, these provisions are frought with many challenges. For example:

• Is the tax law the best way to go? The tax law is for raising revenue. Why not pass a law mandating that homeowners get some percentage of their power from solar? Why not find a way to encourage utility companies to provide more power generated from solar?
• If the tax law is used, how much incentive is needed and for how long? Should the incentive go to the buyer or the manfucturer?
• Are there unintended consequences? Will some current industry be harmed if the government helps develop a new industry? A consequence of efforts to get more alternative fuel vehicles on the road is that federal and state gasoline excise tax collections are down which hurts the Highway Trust Fund (and similar state funds). As noted in the last entry, the Department of Transportation needs Congress to allocate $8 billion to cover a shortfall in the fund due to a drop in gasoline sales.
• How will Congress pay for any new tax credit or deduction?

We'll likely see something enacted this year - perhaps an extension of some of the current energy and green deductions and credits that have expired or will soon expire. But more debate is needed on whether additional tax incentives should be added, how to modernize the gasoline excise tax to maintain the Highway Trust Fund, how to not favor one technology at the expense of another that might also help the environment, and what to do with any new revenue should a carbon or other environmental (polluter pays) tax be created

For more information on this topic, see my recent short article on Green Taxation.

What do you think?