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?

Costs of Reducing Greenhouse Gas Emissions

The CBO released an issue brief on 11/23 - The Costs of Reducing Greenhouse-Gas Emissions (also see the CBO Director's blog entry on this which has links to several other CBO reports on this topic). The report provides some guidance on the costs and the challenges of estimating them.

The report states that market-based approaches, such as cap-and-trade allowances and taxes, are likely to be less expensive than the command-and-control approaches (nothing new there). I'm glad to see the CBO report continue to talk about GHG emission taxes rather than only the cap-and-trade approach in the House passed H.R. 2454 because I think we need to have a real discussion on the varying approaches, their pros and cons in terms of operations and effect and only then, see a bill passed in Congress. The following excerpt from the report is an example of why we should have a serious discussion of cap-and-trade versus tax before committing significant costs to creating and maintaining a cap-and-trade system:

“Most experts conclude that, in the face of such uncertainty, policies that set the year-by-year price of emissions to be consistent with the projected incremental benefits of reducing emissions (as with a tax) would probably yield higher net benefits than policies that specified year-by-year caps on emissions or even a cap on cumulative emissions over many years. The cost of meeting a fixed emission cap is likely to vary substantially from year to year—depending on the weather, economic activity, and the price of fossil fuels. A tax would ensure that firms and households had an incentive to make all reductions that cost less to achieve than that expected incremental benefit. By contrast, a cap could easily generate incremental reductions that cost substantially more or less than the expected benefit.” [p. 4; footnote omitted]

We have some structures in place that would make implementation of a GHG tax less expensive than creating and maintaining a cap-and-trade system. For example, the gasoline excise tax could be increased. Also, utility companies could collect a tax from their customers with the tax adjusted for the percent of energy produced from renewable sources. We know from recent high gasoline prices, that people do respond to them. That awareness leads to behavior changes that will further help to reduce GHG emissions.

Assuming Congress gets back to climate change issues, I hope that despite a House-passed cap-and-trade bill, that the Senate will pursue a discussion of that approach compared to a tax approach.

What do you think?