How to Raise a Good Energy Tax

I was recently asked by the National Journal to comment on what I thought was a desirable path for tax reform, if one could wish away political constraints that normally handcuff politicians. My answer was, of course, to tax energy, particularly carbon emissions, and use the revenue to reduce other taxes. As I and many others have noted often in the past, taxes on oil or gasoline hit many birds with one stone.

Discussion of energy taxes has always been political suicide. But here are several twists that could potentially increase the ability of the electorate to swallow them politically:

1) The energy taxes would not go into effect until the economy fully recovers from the current recession, thereby avoiding an abortion of the recovery. But the plan would be announced in the near future (thereby sending desirable allocational signals to firms building power plants or pursuing renewable energy research).

2) Such measures could be on stand-by, to be enacted in the event of a major unfortunate geopolitical setback in the Middle East or a tragic terrorist event, which would galvanize public opinion to do something sensible for the first time about the extent of US dependence on oil imports.

3) A tax on, e.g, gasoline could be designed to put a floor under the current price. The status quo always generates less political resistance than a tax that raises the price.

4) The revenue from the first penny per gallon could be earmarked to fund the deficit in social security benefits of those retiring in 2027, for example. They were born in 1962, and know who they are. The revenue from the second penny could be used to finance the benefits of those retiring in 2028, and so on. (Numbers are illustrative. I haven’t done the actual calculations.) The result would be to create a constituency for keeping the tax in place, namely those whose retirement benefits are funded with the proceeds.

Comments

[atlasman:]

What 'other taxes" would you reduce and would you do it on a dollar for dollar basis? I suspect your answer is no and like most liberals just want to tax and transfer which only reduces production which reduced the economy which reduces wealth which reduces the economy and so on and so on until we become the Weimar Republic.

May 19 07:05 AM

[Carlos Lam:]

Jeffrey, good idea in theory but not in practice. You can't give me a 100% iron-clad guarantee that Congress and the President will not at some later point also raise payroll and/or income taxes EVEN IF energy taxes have been increased. If your proposal was to include a constitutional amendment prohibiting payroll and income tax hikes, then MAYBE I'd go for it.

As an aside, this is precisely the principle I cite when arguing against the Roth IRA. There is no 100% guarantee that the federal government will allow withdrawals to be tax-free upon retirement. I'd much rather stay in a Traditional IRA and take my deduction in the year of contribution.

May 19 08:00 AM

[paulsjj:]

How about a transaction tax on the trading of CDS's, CMO,s, CDO's, ABS's, etc. The proceeds could be used to save social security, medicare, sate government pensions, feed the poor, clothe the naked, etc...

May 19 08:27 AM

[Bill James:]

The Economy equals Energy times Efficiency.

Tax energy and you will get less economy.

Cap & Trade is thought to be an energy tax, but it is really a performance standard. Free markets will twist this to good use to break the government's monopoly over transportation design since the mobilization to fight World War I.

Companies will defend profits by investing in efforts that can return the principle with interest and carbon credits. Use of petroleum is less than 5% efficient so there is lots of opportunity. The Personal Rapid Transit (PRT or PodCar) industry provides on-demand transport at 200+ passenger-miles per gallon. Like the railroads of the 1860's, funds will flow to support a massive re-tooling of transportation to exploit very high returns on capital with accompanying carbon credits.

seekingalpha.com/artic...

May 19 08:39 AM

[Trane250:]

"The revenue from the first penny per gallon could be earmarked to fund the deficit in social security benefits of those retiring in 2027, for example." Yeh sure.

Those mealy mouths in congress will spend the money as soon as it's collected and, just as now, treasury will put another IOU in the social security trust fund account.

May 19 08:43 AM

[fireball:]

a good tax? at best some are a necessary evil. how about less federal spending instead? would you give a fifth to an alcoholic? more crack to the crack addict? more taxation called a good tax is upsidedown thinking.
God asks for 10%. He asks He doesn't demand. i am afraid to try to figure out how bad taxation has gotten.
has any tax ever gone away? decreased?

May 19 08:50 AM

[Dan Powers:]

On May 19 08:39 AM Bill James wrote:

> The Economy equals Energy times Efficiency.
>
> Tax energy and you will get less economy.
>
Wrong. Tax energy and you get more efficiency. And then more long term growth by an efficient economy.

Great idea, I hope Obama has the cojones to follow this path. Only thing I would change would be to make the floor higher than current costs. $4 a gallon seemed to be the number where we started to see real change.

May 19 09:05 AM

[Ferdinand E...:]

Well, it seems that the voters have bought the crazy idea of cap-and-trade, and so in one sense or another they are going to get taxed. As people like Lord Browne (of BP) pointed out however, cap-and-trade won't work, and so if there must be a tax, then it should be a carbon tax. I have been busy praising a carbon tax, because I like the idea of the proceeds being returned to the person who pay it, however I haven't bothered to work out the details. Accordingly, the suggestion in the first paragraph of this article deserves some attention.

May 19 09:05 AM

[Joyful Alte...:]

Those born in 1962 aren't eligible for Social Security retirement until at least 2029. The retirement age has been rising 1 month per year, so that those born in 1945, for example, can retire at age 66 years, 0 months, in 2011.

Not that anyone without a defined-benefits pension can afford to retire at any age, in any year----

May 19 09:20 AM

[TCK:]

Random thoughts;

Tax anything and get less of it.

If alternate energy was a viable option, then Holland would be today's economic superpower through their use of windmills over the last 400 years !

Gasoline use only accounts for 50% of oil consumption yet is the poster child for the evils of individualism.

You are the Borg. Resistance is not futile !

May 19 09:22 AM

[La Marque:]

Let's tax transportation fuels to at least $3.50 a gallon and not dedicate it to anything except transportation. Even at that level of taxation, there won't be a surplus.
A carbon tax levels the playing field; cap and trade won't. Government should be setting policies that level the playing field; not picking winners and losers.

May 19 09:42 AM

[Glen L.:]

There ain't no such thing as a free lunch or a good tax. All taxation reduces the capital of the entrepreneurial class that is the engine of progress, and gives it to the parasitic class, which squanders it real good. We didn't need tax "incentives" to switch from whale oil to petroleum, and we don't need them now to switch from petroleum to whatever comes next, which is a decision that only the market should make. This is just another leftwing scheme to grab more power from the people they hate.

Interesting phrasing about getting the electorate to "swallow" a tax increase. I would suggest you switch metaphors, more on the lines of greasing up the posterior orifice.

May 19 10:11 AM

[blu:]

I favor the FairTax. Taxing "income" is self-defeating.
The FairTax would get government off our backs. No longer would government be defining "income" to the benefit or detriment of various segments.
We would no longer have to spend the huge amounts of time required for record keeping and accounting of very personal data for tax preparation.

By doing away with the IRS and the idiotic tax code, the politicians will be forced to abandon much of this "class warfare" bull, that we hear every day. There would no longer be "tax brackets" and income levels would become private and personal as they should be.

Many have said the FairTax will never happen, because the politicians are so deeply mired in the tax code. Our tax system is becoming so onerous that I believe the public will start to rebel in the near future. Our kids and grandkids are going to be working for the government on a "half-time basis". That is a terrible legacy to leave them.

May 19 11:35 AM

[John Lounsbury:]

Glen L. - - -

Good points about taxes and lunches. But you are too narrow in your range of criticism. In spite of rhetoric and posturing, most politicians are into power grabs, left and right. There are a few exceptions, but not many.

The other area you could have mentioned is the entrenched influence of the established energy oligarchy. Just as the financial giants have bought the government, so have the combustion based energy industries. Why have we continued to give tax incentives to oil and coal? Is that any different than tax incentives to alternative energy? Some would argue that it is different in a negative way - encouraging undesired behavior at the expense of penalizing desired behavior.

Any way, I am sure I have moved outside the original intent of your comment, but I hope the digression adds to your thoughts.

May 19 11:45 AM

[Engineer-Poet:]

I've long been saying that what the USA needs is $5/gallon gasoline.  That simple policy would have killed the SUV craze while we still had an auto industry left, to give one example.

Glen L. is quite wrong about one thing, and that's where the money goes.  Taxes affect demand due to retail prices, and thus change the division of revenue between domestic government and foreign producers.  Governments like Venezuela and Saudi Arabia are not merely parasitic, they are actively hostile to us.  Taking money spent at the pump and keeping it at home beats sending it to them any way you cut it.  That's what we do when high pump prices depress demand and the price they can get for crude.

May 19 12:08 PM

[henarl:]

And what if the economy does not "fully recover" back to the earlier boom times for decades (think Japan)?

May 19 01:11 PM

[Third Party...:]

Here is a "Good Energy Tax" idea that is over 200 years old:

-End all subsidies on "Alternative Energy", return the savings back to the taxpayers through lower taxes.
-End "Free Trade" on imported oil and gasoline and restore Constitutional Tariffs. Again, return revenues from the tariffs back to the taxpayers through the lowering of taxes.

This will allow all energies to compete on an even level, while at the same time force Americans to face up to the realities of the REAL costs of fuels.

As for the FairTax - It is a horrible idea! The most common number stated is around 22% sales tax. Nothing, and I mean nothing, is in place to stop Congress from raising this to any imaginable percent! 50%, 60%, even 110% sales tax?? NO THANKS. The only good in the FairTax is the repeal of the 16th Amendment!

May 19 06:39 PM

[devassocx:]

Disgusting premise and article.

There is no good energy tax...the cheaper energy is, the better for
society. Energy drives societal wealth.

No reason to transfer even more weath to that black hole known
as the U.S. government.

May 19 08:47 PM

[Engineer-Poet:]

There are plenty of good energy taxes. There are plenty of good taxes, period; taxing anything that's bad for the nation will lead to less of it. Taxing tobacco is a pretty darn good idea.

Excessive use of oil is certainly bad for the nation. It leaves us vulnerable to exporters whose interests are opposed to ours, to put it mildly. People say that the US consumer doesn't care for economical cars; the simple and obvious solution is heavy taxes on oil, to change the consumer's incentives without transferring wealth to the producers. The benefit to the nation is that decreased demand causes not just lower imports but also lower world crude prices, keeping more money in our own economy.

The case for taxes on carbon in general (instead of e.g. sulfur, ash and toxic metals from coal) is harder to make because the benefits are much more diffuse, but it's undeniable that e.g. a 12-foot rise in sea level would be ruinously expensive to many nations. All should slash carbon emissions because all will benefit.

May 21 09:35 AM

[blu:]

Third,

" The most common number stated is around 22% sales tax. Nothing, and I mean nothing, is in place to stop Congress from raising this to any imaginable percent! 50%, 60%, even 110% sales tax?? NO THANKS. The only good in the FairTax is the repeal of the 16th Amendment! "

How about the voters? If we voters can't stop it, then what is our government about?

I would prefer a 22% sales tax (on new items only) to the idiotic income tax which smothers our production through hidden taxes.
One of the other benefits of the FairTax is it's transparency.
The government now raises our taxes beyond belief by manipulating the tax code. What percentage do you think you are paying now? I guarantee you it is more than 22%.
Read about the specifics at fairtax.org.

The proposed cap and trade legislation is another great example.
It is a tax that will increase the cost of gasoline alone, by over $1.40 per gallon, not to mention the increased costs of manufacturing that will be passed on to the consumer.

We are doomed to higher taxes by the crazy spending in Washington. We need a system that is more transparent and easily monitored in order to keep the politicians on the straight and narrow.

May 22 11:38 AM