Example of Alternatives to Solving Problems with the Tax Law

With the EPA announcing on April 1 that it is increasing fuel efficiency standards and adding greenhouse gas emission standards, we are reminded that not all changes in direction need to be motivated, incentivized or forced by tax law provisions. There are many ways to help change behavior such as the following.

• “Command and Control” - Statutes and regulations that require action with some type of penalty imposed for failure to comply, such as the recent EPA change.
• Incentives - If we think of the “command and control” technique as a “stick” to make someone do something, think of incentives as the “carrot” to entice someone to do something. For example, in California, some hybrid car owners were able to get permission to drive in the carpool lanes even with a single driver.
• Market-Based Approaches - Techniques that fall into this category allow economic principles, such as supply and demand, to prevail. With respect to environmental problems, market-based approaches are typically designed to 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 (almost always from the government). For example, while a tax on plastic shopping bags will lead to a better consideration of the true price of selling and using such bags, it is also a mandate because if the bags are used, the tax must be paid. But it allows the consumers to decide if they pay the tax or find an alternative to a plastic bag.
• Education and Information - This technique is just what it sounds like – providing more and better information to individuals and entities so that they may be more likely to do the “right thing.” For example, if people knew how much carbon emissions were produced by around town driving and the fuel costs, they might do better at consolidating trips or walking. The mpg information provided on new car stickers is an example of providing information that can influence behavior.
• 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. They may do this to please their customers, because shareholders demand it, and/or because it is cost effective in the long run. Similarly, individuals may decide to follow a specific course of action because of a strong belief in something or a concern over something. For example, an individual may decide that he or she does not want to contribute any more to air pollution than absolutely necessary and so does not own a car and bikes or uses public transportation.
• Development and Use of New Technologies - Sometimes, technology can fix a problem. For example, if paper waste became a significant problem, the federal government could reduce use of paper by imposing a heavy tax on it or passing a law requiring a specified usage with a penalty for breaking the law. In contrast, technology might eliminate or significantly reduce the problem through such techniques as use of other biodegradable materials for packaging and better systems of digitized information (to replace paper mail and other paper information sources). Of course, the development may be incentived by tax breaks (such as an R&D credit) or government or other types of grants - so also involving incentives and market forces.

Which technique is best to address a problem? It depends on many factors and often, more than one technique is appropriate. Factors to consider include linkage - being sure that the solution and problem are connected; considering unintended consequences such as safety issues and employment changes; and costs.

Work to achieve better fuel efficiency will likely involve R&D and if the research credit is extended beyond 2009, that will provide a market-based approach along with the command and control of higher mileage standards. Perhaps Congress and the Administration will leave it at that, although if they think these approaches are not enough, I'm guessing we'll see new tax incentives for manufacturers or customers to assist all parties in meeting the new EPA standards.

What do you think?