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? 

Gas Tax and Tax Reform

I was recently asked by a reporter for StreetsBlog.org if tax reform might also include an increase in the gas tax.   "Will an Upcoming Tax Reform Finally Be thePlace to Hike the Gas Tax?" by Tanya Snyder,
Streetsblog Capitol Hill, 3/14/13.

I said no.  Tax reform discussions have focused on the income tax. Also, an increase to the gas tax is likely something more for a budget discussion - are more funds needed for the Highway Trust Fund (yes).

Yet, tax reform will focus on cutting back or eliminating tax preferences ("base broadening"). Will that include ones, such as repealing percentage depletion, that benefit the oil and gas industry? President Obama has already suggested this action in his FY2013 budget released in February 2012. If these changes are enacted, tax liabilities for oil companies will increase and quite possibly gas prices.  That doesn't bring in money for the Highway Trust Fund though.  It does make the public less inclined to accept a gasoline excise tax increase and for their elected officials to give them one.  So perhaps tax reform or budget dsicussions should include allocating a portion of the general fund to the Highway Trust Fund.

Tax reform, a time to review the system and identify weaknesses and how to fix them, should ideally consider these transportation-related items:

1. Gasoline excise tax reform - with more fuel efficient vehicles on the road, people buy fewer gallons of gasoline and thus pay less excise tax, but likely drive as many miles or even more than prior to owning the fuel efficient car.  So, a new system is needed.  A common suggestion is to switch to a vehicle miles traveled (VMT) tax rather than the current fixed cents per gallon of gas purchased.  For more on the VMT tax, see this Rand study or just do a Google search on the topic. Oregon has been studying it for years and even did a pilot of it (see 12/27/12 Governing blog post). 
2. Carbon tax - can this help reduce greenhouse gas emissions? Can it help reduce the deficit?  See this March 2013 paper on this topic from the Tax Policy Center.

Excise tax reform can be separate from income tax reform. If income tax reform is focused on the budget though, it should be considered as it affects the Highway Trust Fund. If deficit reduction is also a focus of tax reform, the carbon tax should be part of the discussion.  Note that I'm not advocating for a carbon tax as I think there are some complexities in it and a significant producer of GHG emissions is carbon, such as using gasoline.  So, can existing excise taxes help to reduce GHG emissions?

A 3/15/13 infographic from the White House suggests creation of an Energy Security Trust with "revenue from profitable oil and gas companies."  It suggests that the funds be used for energy projects that will also help create jobs.  Why not also have it help fund the Highway Trust Fund?

What do you think? Should the gasoline excise tax be raised? If yes, when? What about switching to a VMT tax? What about a carbon tax?

New York Times Tax Reform Suggestions

A December 29, 2012 editorial in the New York Times, part of a series of suggestions for President Obama for his second term, makes the following recommendations.

• Tax capital gains at the ordinary income tax rates. They note that the top 1% receive 70% of capital gains while the bottom 80% receive just 6%. Thus, they argue, taxing capital gains at 15% or 20% is "an indefensible giveaway to the richest Americans."
• Cap the benefit of deductions for individuals at 28% or convert them to tax credits.
• Higher rates on individuals with income over $1 million.
• Restore the estate tax (presumably at the 55% rate scheduled to return on 1/1/13).
• Higher corporate tax rates.
• No more deferral of tax for US companies for income earned abroad (presumably they mean by subsidiaries).
• The Treasury Department should "start work on tax reform now" including consideration of a carbon tax, VAT and financial transactions tax.

That is quite a list!

The editorial board notes that our current system is not bringing in enough revenues to cover spending and investment so new revenues are needed.

I have a few comments to offer:

1. Yes, tax reform is needed but not exactly for the reasons noted. The key reason for reform should be that our current system does not meet principles of good tax policy or fully recognize that we are operating in an information-age, global economy. Our tax system has grown complex by the addition of over 100 items after the Tax Reform Act of 1986 and has too many provisions that are temporary and often expired awaiting what often becomes retroactive renewal.  Our tax system is not equitable. Significant deductions and exclusions provide significantly larger benefits to those in higher brackets. There are too many special rules that benefit just a few companies or industries. We have a $450 billion annual tax gap.
2. We have spending problems.  One big one is that significant borrowing, particularly in the past few years has greatly increased the country's interest expense obligations. The GAO has issued a few reports pointing out over 100 areas where there is "evidence of duplication, overlap, or fragmentation among federal government programs." There is significant waste and inefficiencies in the medical care system with much of that paid for by the government (we hear about this often; I have seen this first hand lately with my 80-year old mother who now lives near me). AND, we have significant spending problems in our tax system with its $1.1 trillion dollars of annual tax expenditures (see page 28 of the Deficit Commission's 2010 report). If these could instead be relabeled as direct spending in the appropriate agency's budget, it would likely be easier to get rid of them.  For example, I think that if the HUD budget had a line item - "Subsidy to middle-to upper income individuals to pay mortgage interest on vacation homes," the mortgage interest deduction for second homes would be gone. That is just one example.  But all tax expenditures (special deductions, exclusions, credits and special rates not crucial to the design of an income tax) should be examined to see if they are serving a legitimate purpose, can be improved to better meet equity and simplicity goals, or can be eliminated in exchange for a lowered rate.
3. There are some reasons to tax capital gains at lower rates, particularly long-term capital gains. For example, some portion of a long-term capital gain does represent inflation. But treating all gains on assets held over one year at the same lower rate doesn't make sense. And, the lowered capital gains rate is not tied to inflation. So that theory doesn't work well with the current system. With the Tax Reform Act of 1986, the top rate for both ordinary and capital gain income was 28%.  We managed to live with that. I think there are a variety of reforms needed for capital gains. Certainly, they should not be taxed at rate lower than the payroll tax rate for employees and self-employed (15.3% (other than in 2011 and 2012)) + the lowest individual tax rate.  Why not use an inflation factor rather than a flat lower rate?
4. Given that other countries have lower corporate income tax rates and we are in a very competitive global marketplace, we should not increase the corporate tax rate. We should further examine how to modernize our business tax system (not just corporate tax system) for our new economy.
5. Yes, let's look at a VAT and see if it is something that states could join in on to help modernize their out-dated sales tax systems. The VAT might help with other federal issues. After all, almost all other countries have a VAT and that is likely how OECD countries help funded a lower corporate tax rate (by increasing the VAT rate).
6. Yes, let's look at a carbon tax as a polluter-pays tax to help reduce greenhouse gas emissions. We should see if this needs to be a separate tax or can be accomplished with a higher gasoline excise tax and some type of tax on other fossil fuels and other sources of GHG.
7. We should also be exploring how technology can improve tax compliance.
8. Starting point - let's articulate our economic, societal and environmental goals. Then let's see how our current taxes may work counter to those goals. That would help us in identifying problems along with evaluating our current rules against principles of good tax policy.

What do you think?

Carbon tax recommended to President's Deficit Commission

At least one person has suggested to President Obama's Deficit Commission that a carbon tax be enacted to both reduce the deficit and debt and to reduce carbon emissions.

Gilbert E. Metcalf, Professor of Economics at Tufts University, submitted a 6-page proposal that provides a clear and concise rationale for the suggestion. Some of the additional advantages Dr. Metcalf sees with a carbon tax is that it would eliminate the need for creating tax incentives to promote renewable energy and it could prevent the need for "inefficient" regulation of carbon emissions.

He suggests that that a carbon tax start "in 2015 at $30 per ton CO2e and
growing at an annual rate of 5 percent plus inflation."

A summary and link to his paper can be found here.

What do you think?