Earth Day and Taxes

Happy Earth Day!  I hope we treat everyday as Earth Day. Before getting to taxes, I have to note anytime I mention Earth Day that is was created in 1970 by Gaylord Nelson who was later a senator and governor from Wisconsin. But, he is an alum of San Jose State University!

Our federal income tax is an odd and unfortunate mix of incentives for oil and gas (such as benefits for intangible drilling costs) and incentives for clean or alternative energy such as a vehicle credit for hybrid and electric cars among other credits.

Thus, our income tax doesn't reflect out country's economic, societal and environmental goals. Or, more likely, we don't know what our goals are for the environment which is not good for our Earth.

If our federal tax system reflected concern for protecting the Earth, we'd see such measures as:

1. Phaseout of incentives for fossil fuels.

2. An increase in the gasoline excise tax which has remained at 18.4 cents per gallon since 1993 and is not even adjusted for inflation. And every year we have more electric cars that don't pay this tax even though they use the roads. We are way past the time to start implementation of a vehicle miles travelled (VMT) tax. Oregon, California and a few other states have already investigated this. In tax reform discussions leading up to the TCJA, a Senate Finance Committee working group on infrastructure and taxes suggested a VMT and noted that the lead time needed was 10 years!  We're already wasting time not working on this suggestion from 2015.

3. Remove any tax incentives that might encourage building in fragile areas such as coastal areas and the mountains.  Years ago, the Friends of the Earth suggested getting rid of the mortgage interest deduction for a second home as most such homes were vacation homes in the mountains or beach area. That is just one of many reasons to get rid of the mortgage interest deduction on second homes!

4. Review incentives for alternative energy to be sure they are meeting their goals. If not, repeal them or reform them. 

5. Form a well-rounded and informed task force to work on designing a carbon tax + possibly a tax or other approach to reduce production of other greenhouse gases. These taxes don't have to be at a high rate, but I think they are needed to help everyone who generates greenhouse gases (all of us!) to be aware that we do. And we need to look at more than a carbon tax because fossil fuels are just one source of greenhouse gases.

What do you think? What are your ideas?

The carbon tax war

Well, it's not a carbon tax war yet as neither side of this issue in Congress seems to have it as their number one issue.  A carbon tax aims to increase the cost of using one type of fuel that leads to greenhouse gas (GHG) emissions and climate change. There are other types of GHG emission, but per the EPA, carbon emissions represent 81% of the total. There are negative externalities of using carbon fuels (gas and coal for example) in that the emissions harms the environment and leads to climate change. To help address these costs, the cost of the carbon producing items needs to be increased, thus, the call for a carbon tax.

While coal and gas (including natural gas) are key carbon emissions, a carbon tax would need to be imposed on each of these types of emissions to truly be a carbon tax. Sometimes, a proposal only calls for imposing it on gasoline by increasing the existing tax on this fuel. This would be easier as the gasoline excise tax already exists, but it then ignores the negative externalities of other sources of GHG emissions.

There has been increased attention on a carbon tax recently due to presidential candidate Senator Bernie Sanders talking about it. These discussions tend to be very narrow and he seems to focus on a carbon tax being the only way to address climate change.  I recall in a debate with Secretary Clinton that he asked her - do you support a carbon tax or not.

There are other ways to address the negative externalities of GHG emissions. This includes fees, penalties for excess emissions, education, and support for use of alternative energy sources that do not produce GHG emissions.

There has been some recent activities in Congress and the White House:

• H.Res. 767 passed in the House on 6/8/16 to express the “sense of Congress that a carbon tax would be detrimental to the United States economy” and “opposing the President’s proposed $10 tax on every barrel of oil.”

• President Obama proposed the $10 per barrel fee on oil to be imposed on oil companies in a 2/4/16 Fact Sheet on his 21^st Century Clean Transportation System. The plan is designed to encourage investment in clean transportation options that can also help reduce what President Obama refers to as a hidden tax due to congestion that annually “costs families $160 billion and businesses almost $30 billion.”  One likely reason why he proposed this is that Congress will not increase the gasoline excise tax which has been 18.4 cents per gallon since 1993 (see my blog post of 8/17/15). One reason is that too many members of Congress have signed the pledge to not increase taxes, which hurts our tax system. (For example, this pledge supports keeping an ineffective credit, deduction or exclusion because to get rid of it would be a tax increase.)

• S. 1548 (114th Cong), American Opportunity Carbon Fee Act, would “impose fees on: (1) fossil fuel products producing carbon dioxide emissions, including coal, petroleum products, and natural gas; (2) fluorinated greenhouse gases; (3) emissions of any greenhouse gas from any greenhouse gas emissions source; and (4) methane emissions.” In addition, this proposal: “Reduces the maximum income tax rate on corporations to 29% of taxable income over $75,000. Allows a new carbon fee offset tax credit for the lesser of: (1) 6.2% of earned income, or (2) $500.”  Also see 6/10/16 statement of sponsors Senators Whitehouse and Schatz, and their 1-page summary of the legislation.

Issues that need to be addressed in a carbon tax include:

• Equity - the tax is regressive in that it represents a bigger percentage of the income of a low-income taxpayer relative to a high-income taxpayer.  The credit in S. 1548 addresses some of this concern.
• Simplicity - how can such a tax be designed to be simple rather than add a new layer of complexity onto what is already a complicated tax system.
• Fit - does the tax best fit the problem. For example, only taxing gasoline doesn't address the problem that other fuels also produce GHG emissions. 
• Alternatives - what alternatives exist. In addition to the ones I mentioned above, the current tax provisions incentivizing production of carbon fuels should be cut back.

What do you think? 

Tax Aspects of Greenhouse Gas Legislation - H.R. 1424

H.R. 1424, passed in the House recently, is the cap and trade proposal to help reduce greenhouse gas emissions. This bill is over 1,400 pages long! There are a variety of tax issues associated with carbon offsets and emission allowances. For example, is an emission allowance, which can be traded on an exchange, a financial instrument or an amortizable Section 197 intangible? Hopefully, the answers to the various tax issues, including whether the receipt of emission allowances from the government for free constitutes taxable income, will be addressed in the final legislation since that would be quicker than the IRS providing such guidance or the IRS finding out that statutory changes are needed to allow for the guidance.

I have a short article from the AICPA Tax Insider on the basics of HR 1424 and its few tax provisions and the tax issues it raises.

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?

Unusual Taxes - Often Not Ideal for Tax Systems

In efforts to either raise new revenue or change behavior, or both, we sometimes see some unusual tax proposals from lawmakers. Here are a few recent examples, some of which were enacted:

New Mexico - 1% excise tax on the sales price of televisions, video games, and video game equipment. The revenues would go into the "leave no child inside fund" to be used for outdoor curriculum programs, transportation for children to have an outdoor experience, to provide "outdoor nature-oriented physical activity programs" for children and similar purposes. This bill, HB 583 was estimated to raise about $1.85 million each year. As the name for the proposed law suggests - Leave No Child Inside, the goal was primarily to change behavior - get kids away from TV and video games and outside. It's unlikely that it would have changed behavior, but it would have provided extra moneys for outdoor education and activities. One of the supporters of the bill was the Rio Grande Sierra Club. This bill died in committee in March 2008.

Issues include:

• Is there really a good reason for this new tax? If there is a need to increase funding for parks so they have more programming for kids, why not use general fund revenues?
• Why single out video games and TV? Other things that keep kids inside include DVDs, games they can access on their computer (even for free), Girl Scout meetings, homework, chores, and much more.
• What about the definitional problems? Issues would certainly arise as to how to what is a video game, how to apply the tax if a video game is purchased online or from out-of-state, and more.

Chicago - a bottled water tax went into effect in 2008. See earlier blog post.

California - oil taxes. In March, a bill - ABX3 9 was proposed and died when it failed to get California's required 2/3 majority vote for a tax increase. This 2-part proposal included a severance tax on oil (not really unusual since many states already have them) and a 2% surtax on oil company taxable income over $10 million. Two unusual aspects - why single out oil companies for a higher income tax - why not other profitable companies? After all, California has a $15 billion budget shortfall. The other unusual item was that all revenue generated would go to the Superintendent of Public Instruction to alleviate budget cuts that are presently causing some K-12 teachers to get layoff notices.

Issues include:

• Earmarking taxes, particularly when there is not connection between oil and funding education. Also, when oil company income drops, so would education funding.
• Singling out one industry for special treatment (here, higher taxes) adds complexity to the law because special definitions are needed to define that industry.
  (See op ed.)

New York City - a congestion tax was proposed in 2007 by Mayor Bloomberg (New York Times story, 4/22/07). This is not an original idea because it is used elsewhere, such as in London. It addresses the problem - if you want to reduce congestion, make it more expensive to enter a location during certain hours. It will encourage people to find other means, such as walking or public transportation - or just waiting to enter when the tax is lower or not imposed. It does raise some administrative challenges, but it doable. We'll see what happens.

European Union - a proposal to tax cars based on how much they pollute (Reuters story, 11/13/07).

Issues include:

• How to measure how much cars pollute? The easy ways, such as by adding the tax on at time of purchase based on the year and make of the car won't work because people drive different amounts annually. People are unlikely to keep good records of how much they drive annually.
• Driving habits can affect pollution. Driving faster uses more gas as does driving with lots of stuff in the trunk.
• Visitors (although most probably drive in from another EU country) cause pollution, but not be taxed (depending on the system for assessing the tax).
• While a good idea, administrative difficulties probably make a tax at the pump a better approach.

There are certainly many others. One from a few years ago was a proposal in Detroit to tax fast food (CNNMoney.com article, 5/9/05). Significant issues include the rationale for such a tax (other than to raise revenue) and the many issues that would arise in trying to define fast food.
Often these unusual taxes arise when lawmakers are desparate for money, a situation that often doesn't lead to changes that are good for a tax system.