A recent story from Seattle showcases the absurdity of the attempt by a few vocal intellectuals to convince U.S. conservatives that a revenue-neutral carbon tax is on the table. Academic economists can continue to discuss the wonders of a large carbon tax in which all revenues are used to reduce corporate tax rates—though even in theory, this is a knife-edge result, as I’ve explained before—but in the real world, an American carbon tax will go down as a huge net tax increase. This is because progressives will clamor for new spending on “green” investments and transition assistance to poorer individuals hardest hit by rising energy prices. You know that some of the biggest “conservative” cheerleaders of a carbon tax know this too, because they’re moving their rhetoric away from “offsetting tax cuts” to “deficit reduction.” In case it’s not obvious, if a new carbon tax is used to “reduce the deficit,” then it’s a net tax hike.
Seattle Greens on Revenue Neutrality: “What Are You, Some Kinda Comedian?!”
The Seattle article discusses the internal bickering among activists who want a new carbon tax (or cap and trade program) in Washington State. On the one hand are the supporters of Initiative 732, which would impose a stiff carbon tax but refund 100 percent of the receipts to Washington residents in the form of offsetting tax rate reductions. On the other side of the dispute stands The Alliance for Jobs and Clean Energy, the name of which speaks for itself. The following excerpt from the news article provides the details and some comic relief:
The I-732 crowd is more of an upstart, eclectic bunch, led by [Yoram] Bauman, a Ph.D. economist who also performs as a comedian. He bills himself as the world’s first-and-only “stand-up economist.” But he’s dead serious about climate policy…
…As with many political disputes, this one is largely about money.
As a “revenue-neutral” plan, I-732 would not fill state government coffers with cash. While the carbon tax would raise an estimated $1.7 billion a year…it would give away an equivalent amount back to consumers, mostly through a full percentage point cut in the state sales tax.
That differs from cap-and-trade legislation offered up by Inslee and backed by the alliance in this year’s legislative session. That plan would have raised more than $1 billion a year from fees on carbon and directed the proceeds to the state education budget, transportation projects, affordable housing and other programs.
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Spending revenues
[Alliance steering committee member] Mann and other alliance supporters suggest that spending carbon-tax revenues on clean-energy investments, schools and other community programs could prove more popular than tax cuts.
And there you have it. We’re not even talking about political officials promising one thing, and then betraying voters once they get the program in place. No, even at the outset, some of Seattle’s leading environmentalists—as well as the sitting governor—are licking their lips over dollar signs.
Conclusion
To academic economists, a carbon tax represents a way to change incentives and induce people to “internalize the externalities” as estimated by computer models. Since that’s the purpose, it is fine on a blackboard to devote the revenues to offsetting tax cuts for corporations.
But to professional environmentalists and political officials, a carbon tax is a ticket to many billions of dollars, so long as they hand out enough of the proceeds to gain support from their constituencies. Which of these two camps—the academic economists or the green activists—are likely to come out on top in the political process if a carbon tax passes?
