How should government spend carbon tax revenues?

A high-powered group of Republicans and business executives proposed replacing regulations for reducing greenhouse gases with a carbon tax. The two most interesting things about this initiative are who proposed it and what they’d do with the money.

Jim Cole/AP/File
A plume of steam billows from the coal-fired Merrimack Station in Bow, N.H., Jan. 20, 2015.

The other day, a high-powered group of former senior Republican policy advisers and business executives proposed replacing regulations aimed at reducing greenhouse gases with a gradually increasing carbon tax starting at $40-a-ton. The tax itself is a fairly standard carbon levy that many others have endorsed. The two most interesting things about this initiative are who proposed it, and what they’d do with the money.

Members of the group, which was organized by the Climate Leadership Council, include a who’s who of the GOP policy establishment.  They include James Baker and George Shultz, who served as secretaries of State and Treasury under Republican presidents (Baker was also chief of staff in two administrations), former Treasury Secretary Henry Paulson  and former chairs of the Council of Economic Advisers Martin Feldstein and Greg Mankiw (full disclosure: Greg is a member of the Tax Policy Center's advisory board).

Such a levy would produce an enormous amount of money. The Congressional Budget Office estimates that a smaller tax ($25-a-ton) would raise $977 billion over the first 10 years. There are many ways government could use those dollars. The authors of the new plan, perhaps in an effort to reach out to moderates and progressives, proposed rebating all of it back to households. They figured that in the first year, a family of four would receive $500.

There are some good reasons to rebate at least some of these tax revenue.  Since low-income consumers spend a larger share of their income than those with higher incomes, they’d be disproportionally hit by this higher tax on fossil fuel consumption. Not only would they pay the tax directly through their purchase of gasoline and most electricity (which often is produced by coal or natural gas), they’d also be taxed indirectly on the carbon context of everything else they buy (think about the energy used by the factories that produce the goods we consume).

A rebate (or a refundable tax credit) would soften the blow. When such a plan was proposed in Washington State last year, voters rejected it, in part because it was opposed by many environmental groups. They had other uses in mind for the money, including investment in environmentally-friendly energy sources, more regulation, and aid for low-income communities.

How else could government spend those funds? In a helpful 2016 paper, my TPC colleagues Donald Marron and Adele Morris described four broadly different uses for the money:   offsetting the new burdens that a carbon tax places on consumers, producers, communities, and the overall economy;  supporting further efforts to reduce greenhouse gas emissions; ameliorating the harms of climate change; and funding public priorities unrelated to climate such as reducing other taxes or reducing the budget deficit.

The first bucket could include not only the rebates in this new plan but also subsidies to coal mining communities that suffer economic losses from curbs on production of fossil fuels. Rebates could be a simply-designed per capita check or they could be more complex and, say, give bigger payments to lower income households.

The second might include more regulation or subsidies to encourage people to seek alternative energy sources such as solar panels or electric cars.

The third use of funds might be to assist those living in communities that have been damaged by climate change, such as coastal towns that face more frequent flooding.

The final use—one that is the subject of much interest these days-- might be to finance tax reform or buy down corporate or individual tax rates.  Donald Marron and TPC’s Eric Toder have described in more detail how a carbon tax could help finance corporate tax reform.

The debate over a carbon tax is a long game given the remote chance that such an idea would win the support of President Trump or House Republicans. If the issue does get a serious look, the debate will focus on both the technical design of the tax and how revenues would be spent. Politics being what it is, such a tax would likely support some combination of other tax cuts and new program spending. The new proposal, which goes all-in on one use of the funds, is an example of the many options on the table.

This story originally appeared on TaxVox.

You've read  of  free articles. Subscribe to continue.
Real news can be honest, hopeful, credible, constructive.
What is the Monitor difference? Tackling the tough headlines – with humanity. Listening to sources – with respect. Seeing the story that others are missing by reporting what so often gets overlooked: the values that connect us. That’s Monitor reporting – news that changes how you see the world.

Dear Reader,

About a year ago, I happened upon this statement about the Monitor in the Harvard Business Review – under the charming heading of “do things that don’t interest you”:

“Many things that end up” being meaningful, writes social scientist Joseph Grenny, “have come from conference workshops, articles, or online videos that began as a chore and ended with an insight. My work in Kenya, for example, was heavily influenced by a Christian Science Monitor article I had forced myself to read 10 years earlier. Sometimes, we call things ‘boring’ simply because they lie outside the box we are currently in.”

If you were to come up with a punchline to a joke about the Monitor, that would probably be it. We’re seen as being global, fair, insightful, and perhaps a bit too earnest. We’re the bran muffin of journalism.

But you know what? We change lives. And I’m going to argue that we change lives precisely because we force open that too-small box that most human beings think they live in.

The Monitor is a peculiar little publication that’s hard for the world to figure out. We’re run by a church, but we’re not only for church members and we’re not about converting people. We’re known as being fair even as the world becomes as polarized as at any time since the newspaper’s founding in 1908.

We have a mission beyond circulation, we want to bridge divides. We’re about kicking down the door of thought everywhere and saying, “You are bigger and more capable than you realize. And we can prove it.”

If you’re looking for bran muffin journalism, you can subscribe to the Monitor for $15. You’ll get the Monitor Weekly magazine, the Monitor Daily email, and unlimited access to

QR Code to How should government spend carbon tax revenues?
Read this article in
QR Code to Subscription page
Start your subscription today