Tax Reform: A $1.5 Trillion Missed Opportunity, For Now

By Nigel Purvis and Maria Belenky
Climate & Energy

Last month, budget-conscious Congressional Republicans passed a massive tax reform package that will likely add at least $1.5 trillion to the U.S. federal deficit over the next 10 years. But here’s the thing—it didn’t have to. One sensible and responsible revenue-raising option would have gone a long way in helping to close the funding gap: a carbon tax.

Earlier this year, Climate Advisers and ecoAmerica calculated that imposing a $25 tax on every ton of greenhouse gas emissions released into the atmosphere—a relatively low rate in most environmental circles—would raise over trillion dollars in revenue over the next ten years. Just this one revenue source, if used in its entirety to address the deficit, would offset two-thirds of the funding gap left open by the tax reform package. Trimming off funds to provide assistance to households who may face higher energy prices would still leave a sizable sum for corporate tax reductions and other conservative priorities.

This analysis was done in support of a proposal that we are calling Price and Block Grant (P&BG). Under the P&BG approach, it is U.S. states that receive the majority of the revenue in the form of block grants. The balance is reserved for reducing federal taxes or funding select new federal spending. State grants would maximize the economic, social and political benefits of allowing local governments to tailor spending to best match their needs. Meanwhile, pricing carbon at the federal level would spur action across the entire U.S. economy and do so efficiently with minimum economic distortions. On the whole, P&BG would allow the U.S. to address key national and state priorities without massively increasing the federal budget deficit.

Price and Block Grant is just one of the carbon pricing schemes that have been put forward over the past decade. Cap and trade, which limits emissions through the issuance of a limited number of allowances to pollute, has brought in millions of dollars for California and the northeastern states that part of the Regional Greenhouse Gas Initiative (RGGI), even as allowance prices have stayed relatively low. California extended its program last summer while RGGI just tightened its emissions cap to achieve additional reductions between 2020 and 2030.

Other popular proposals include Fee and Dividend, which returns all revenue to households—this is the approach championed by the conservative Climate Leadership Council—and Fee and Invest, which promotes investments in clean energy, resilient infrastructure and other technological innovations. [See this graphic for a more detailed comparison.][LINK] Regardless of the approach, implementing an economy-wide price on carbon one of the most efficient means of raising revenue and reforming U.S. tax policy while remaining consistent with the conservative principles of limited government.

Despite its benefits, a carbon price was not on the table in Washington this past fall, even though overwhelming scientific evidence points to a link between carbon emissions and rising temperatures. Even though the Trump Administration is not actually willing to challenge the Endangerment Finding—the ruling that categorized carbon dioxide as a pollutant. Even though the EPA is considering a regulatory replacement for the Clean Power Plan. Even though a carbon price has the support of prominent Republican thought-leaders. And even though oil and gas companies, Republican lawmakers’ largest backers, use a carbon price internally and support it publicly.

A carbon tax was not on the table simply because the majority of elected Republicans feel forced to publicly ascribe to the climate hoax narrative, even when they do not believe it themselves. But ideological purity cannot be an excuse. We can and should do better.

The new year brings new opportunities. Having dealt with tax reform, the administration now turns to another priority: infrastructure. During the campaign, then candidate-Trump called for an infusion of $1 trillion “transform America’s crumbling infrastructure into a golden opportunity for accelerated economic growth”. The American Society of Civil Engineers, who routinely gives U.S. infrastructure grades one would hide from mom and dad, projects a $2 trillion investment gap over the next decade. Private investment will play a role, but improving the nation’s infrastructure will undoubtedly require public spending. Will it also require a growing deficit?

It doesn’t have to. Carbon pricing—and a scheme like Price and Block Grant in particular—offers an attractive mechanism to raise revenue for important new investments in U.S. infrastructure. Because much of infrastructure spending is controlled by states, block grants can help bridge (pun intended) local budget shortfalls where needed, all the while remaining consistent with conservative principles of limited government and local control.

Carbon pricing is not easy, but it is the right next step for a nation that has always been at the forefront of innovation and scientific thought. It is time for the Climate Solutions Caucus to offer solutions, and it is past time for Congress to have an honest conversation about carbon pricing in the United States.

Bob Perkowitz, CEO of EcoAmerica, also contributed to this report. 

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On January 22, 2018

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