Tax Carbon, Not Red States
In an editorial this week, Bloomberg View endorsed cutting greenhouse gas emission with a revenue-neutral carbon tax, with all the money raised going to cut other taxes. That leaves one crucial question: How should that new revenue be divvied up among U.S. taxpayers?
Getting it right could be the key to countering a legitimate concern: that a carbon tax would simply serve to transfer wealth from conservative states to liberal ones.
Of the 10 states with the greatest per-capita emissions -- the states whose residents would pay the most, individually, under a per-ton carbon tax -- each voted for Mitt Romney in the last presidential election. Among the 10 states with the lowest emissions per capita, nine voted for President Barack Obama. (The exception was Idaho.)
Why is that? Part of it reflects where the country's energy-heavy industries are located, but it also stems from cultural preferences. Look at last week's findings from the Pew Research Center. Pew asked respondents where they would rather live: In a community where the houses are smaller and closer together, with schools, stores and restaurants in walking distance, or one where the houses are larger and farther apart but schools and stores are several miles away.
On average, respondents were evenly split between the two types of neighborhoods. But when you sort preferences by ideology, three out of four of the most liberal respondents said they preferred smaller homes with more walking, while the reverse is true for the most conservative.
So conservative objections to a carbon tax don't just reflect doubts about the science of climate change or the size of government; they may also reflect a rational calculation of self-interest. If Congress wanted to avoid turning a carbon tax into an interstate wealth transfer, it would need to get creative.
The tax reductions most often proposed to offset a carbon tax -- lowering the corporate income tax, reducing the personal income tax rate or simply cutting every household an equal-sized check -- wouldn't necessarily lessen that regional imbalance. What other options might work?
One would be to soften the blow of the carbon tax, by returning some of it in the form of a rebate, sent to every household that spent more than a certain percentage of its income on energy. (It would probably require providing some documentation, such as electricity bills and gas receipts.) While that formula wouldn't explicitly favor conservative, carbon-intensive states, it could be calculated so that was the effect.
A simpler approach would be for the federal government to return a share of the carbon-tax revenue to state governments as block grants, with the size of the grants relative to how much each state's residents paid. The state government could then decide how best to distribute that money to residents.
Of course, there's another option: Advocates of pricing carbon could simply insist that because people in red states emit more greenhouse gases, they should pay higher taxes to match. That may make economic sense, but it's a political landmine. We might as well start figuring out how to get around it.
This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.
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