Carbon tax could be part of eventual tax reform package

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The contention by some journalists and progressive activists that the administration has done too little to address climate change in its first term is deeply ironic. In reality, even in the face of the worst economic crisis in 75 years, the White House pursued the same cap and trade policy after the economic meltdown it conceived before it. The political and policy costs of this decision are far-reaching and still very much in evidence.

For one thing, support for the House climate bill was a key element in the loss of the Democratic majority in the House of Representatives in the 2010 election, with Democrats' votes for the bill featuring prominently in GOP advertising during the campaign. Forcing House Democrats to take these politically difficult votes in the midst of the recession was especially galling to many moderate Democrats because the House climate bill never had a realistic chance of Senate passage, where centrist Senate allies of the president urged other measures like a renewable energy standard.

The House bill’s rent-seeking and tax-raising provisions in the middle of a recession all but goaded Republicans to take increasingly radical opposing positions on climate change out of sheer political opportunism, with among other consequences climate denial emerging as a central plank in the rise of the Tea Party in the summer of ’09. Missing entirely from the administration’s climate narrative was any attempt to appeal to centrists by using revenue generated from the program to cut middle class income taxes, grow the economy or deal with burgeoning debt.

Given this painful history, the president’s almost testy press conference response — “if the message is somehow we’re going to ignore jobs and growth simply to address climate change, I don’t think anybody’s going to go for that” — becomes more understandable. As a result, the resident and other administration officials have repeatedly said in recent weeks that the administration will not propose a carbon tax. This is wise. To do so would mean automatic opposition from Republicans, and throw an unwelcome and unnecessary complication into the fiscal cliff negotiations.

Yet the economic advantages of a carbon tax are so manifest that it is still possible, once the fiscal cliff negotiations are finished and talks turn to a truly transformative tax reform deal, that leaders in Congress will begin to reconsider it, especially it if is marketed on economic grounds.

All major bipartisan reform proposals like Simpson-Bowles and Domenici-Rivlin have included, along with elimination of tax deductions, some sort of new revenue, which allows for both aggressive deficit reduction and lowering income tax rates for the middle class, a stated priority for both parties. Yet few politically realistic options to generate new revenue exist. Several plans have proposed a national sales tax, but this has historically been the prerogative of the States and seems a political non-starter. Simpson-Bowles proposes a 15 cent a gallon gasoline tax hike which not only generates relatively little revenue for its political risk, but singles out the powerful oil lobby.

In fact, major oil companies, who played a powerful role in killing cap and trade and oppose a gasoline tax, generally favor a carbon tax as part of overall tax reform, as do many others segments of corporate America. A carbon tax is also supported by many economists from both parties. Arthur Laffer, Gregory Mankiw, and Douglas Holtz-Eakin are just a few of the politically prominent Republican economists to speak favorably about a carbon fee.

This support is on economic grounds. Major studies, including one from the non-partisan think tank Resources for the Future, show that a tax on carbon is better for overall US economic growth than the current mix of higher taxes on work and capital that a carbon tax could displace. In other words, climate change aside, a carbon tax is simply better for economic growth. This would seem to meet the President’s own criteria from last week:  “If, on the other hand, we can shape an agenda that says we can create jobs, advance growth and make a serious dent in climate change and be an international leader, I think that’s something that the American people would support.” 

Such a tax may prove effective in producing a more robust U.S. clean technology sector and reducing greenhouse gas emission (RFF estimates a 10 percent drop in emissions over business as usual by 2020 from a $25 a ton CO2 tax)—but its main selling points are fiscal and budget policy.

It may be that the American polity is so broken that Congress simply cannot embrace the best tax, economic and climate policies. Nonetheless, Congressional leaders are aware that the president is obligated under current law to regulate greenhouse gas emissions in some manner, and is deeply committed to doing so. This means Republicans and Democratic moderates will in effect be choosing higher cost command and control regulation of emissions by EPA rather than a lower-cost market approach that helps the economy.

The president is right to focus on revitalizing the struggling middle class and restoring robust economic growth, which will leave him in a stronger political position to pursue other priorities. And while carbon tax could yet play a critical role in that agenda, Congress will have to take the critical first steps.

Bledsoe is president of Bledsoe & Associates, a Washington-based consultancy. He was a staff member of the Senate Finance Committee under Senator Daniel Patrick Moynihan and of the White House Climate Change Task Force under President Clinton.