Commentary: Give Green Taxes A Green Light

Suggesting a carbon or gas tax has long been political poison. But that doesn't seem to be deterring legislators in Vermont, Minnesota, and Maine. All are debating or pushing bills that would cut levies such as property or income taxes and make up the revenue with taxes on fossil fuel.

The chances of passage for any of the legislation anytime soon are slim. That's unfortunate. Such conversions to "green" taxes could be just what the country needs. Energy use imposes hidden costs--such as the health costs of pollution, lost productivity from traffic congestion, and the threat of global warming--which aren't reflected in its price. "Taxes on resources correct one of the most glaring flaws of market economies: blindness to environmental costs," argue Alan Thein Durning and Yoram Bauman in a new book Tax Shift.

The beauty of tax-shifting is that the overall tax burden stays the same: the new "green" taxes are balanced by cuts in other taxes. Economists generally agree that payroll, income, property, and other taxes discourage investment in labor and capital. Cutting these taxes could thus spur productivity and growth while the green taxes bring environmental benefits. "There may not be a free lunch, but there is almost certainly a lunch worth paying for," says Stanford economist Lawrence H. Goulder.

Some green taxes are on the books overseas. Since 1996, the Netherlands has been raising about $900 million annually with a gas and electricity tax--and returning it with cuts in Social Security premiums. That's proven too small to lower consumption appreciably, says Dutch environmental official Pieter Maessen, so the country plans a $1.7 billion boost to the tax. Similar tax shifts are on the books in Denmark, Finland, and Sweden.

The U.S. has been less adventurous. But states are exploring options. In Minnesota, a proposed revenue-neutral bill would slash property taxes by about 25% in exchange for a $50-per-ton tax on the carbon in fossil fuels. That translates to a tax of 4 cents to 5 cents per gallon on gasoline, or a 25% increase in the price of coal. In Vermont, legislator Ben Rose has introduced a bill which would impose a $100-per-ton carbon tax with cuts in other levies. Legislators in Maine are contemplating similar measures.

BURDEN. Unfortunately, business dislikes these ideas. When Minnesota legislator Ann H. Rest proposed replacing payroll taxes with an energy tax in 1996, coal interests tarred the plan as a burdensome tax increase. Since then, Rest and her backers have armed themselves with economic studies showing a net benefit to the state and made the measure more politically attractive by targeting the property tax for cutting.

There are problems with tax-shifting: Some energy-intensive manufacturing industries would be harder hit than high-tech companies. "This is an antibusiness proposal," fumes Northwest Airlines Inc. spokesperson Kathy Peach, who pegs the cost to the company at $47 million per year. Even companies such as Honeywell Inc., which stand to benefit from the legislation by selling more energy-efficient equipment, are against the bill. "We can't solve these problems on a state-by-state basis," explains Glen Skovholt, vice-president for government and community affairs for Honeywell.

Another worry is that lawmakers won't deliver on tax cuts once the "green" taxes are in place. The Dutch energy tax hike "is like the nose of the camel [under the tent]," frets economist Wiel Klerken of the Dutch Employer's Assn., while the tax cut "can be reversed at any time." But it's easy to guarantee that all tax shifts be revenue-neutral.

Taxes have always favored one sector or group over another. So why not use the carrot and stick more wisely? If energy consumption taxes replaced income and sales taxes, people could reduce their tax burdens by becoming more energy efficient. "People could earn more and spend more and yet pay less tax," explains M. Jeff Hamond, director of fiscal policy at liberal think tank Redefining Progress, which is holding a tax-shifting symposium in Washington on Apr. 7. It's about time Americans were given that choice.

Before it's here, it's on the Bloomberg Terminal.