Taxing Environmental Use

[dcmdale]

Just for fun in a purely academic exercise for those who like to think about such things.

Since at least the mid-1970’s, when I first heard about it, there has been a proposal in the environmental community to tax the release of pollution into the environment. So far as I know (without researching it), this idea has never had any traction in the U.S. There are probably many reasons for this, both political and practical, and it probably never will get serious attention.

The proposal would be something like, that:

“We replace the Federal Income Tax, completely and on a revenue neutral basis, with a tax collected from businesses reflecting the non-beneficial use of the environment in the production or utilization of goods and services. As a revenue neutral tax, it will adjust to maintain revenue neutrality as consumption changes.”

I frame this as a replacement tax rather than a new tax as it is usually discussed because people (often rightfully) view new taxes as a wedge for government to get to additional taxes. I have framed it as a change on a particular date for discussion, but certainly that would not be practical as the economic jolt would be too great—not that there is any chance that this would actually happen anyway. The adjustment clause implies that non-conformers would face increasing economic pressure as time went on.

Here is the basic philosophic rational: ever since the institution of the income tax, conservatives have complained that we are taxing (therefore discouraging) activities that we really want to encourage (economic growth, employment, efficiency). Rather than tax good activities, conservative doctrine would suggest that we tax things that we prefer to discourage. While conservatives may debate the reality of global warming and other mega environmental issues, nobody is going to stand up and say, “Releasing CO2 into the environment is a higher societal good than making new jobs!” I have a lot of respect for how capitalism drives efficiencies in economic terms. When public resources such as the air are economically valued at “free” (at least to the polluter), capitalism will treat them a having a zero cost and skew capitalist decision-making in the direction of abuse of that resource.

So, there are a number of obvious practical and political issues associated with this proposal. The following are the ones that immediately occur to me:

--Determining what constitutes “detrimental use” what the weighting should be between detrimental usages. Is “sound pollution” covered? How does automobile exhaust weight in comparison to heat pollution from nuclear power. Do windmills that slice up birds get nailed? What about risk? A functioning nuke produces a different pollution profile from one melting down.
--Measurement issues—including such things as do you have a set “per gallon” tax at the gas pump (discouraging innovation that might result in higher gas usage but lower emissions) or tax based on the emissions of the actual car you drive (hard to administer and prone to fraud).
--Economic disruption
--Balance of Trade / Import / Export Issues
--Smuggling / Organized Crime

What am I missing?

As a practical matter: if you woke up tomorrow (just as one example) and you had zero income tax, but gas cost $7.29 / gal. (and likely go up to $14.00 / gal,. within 5 years), what would change? Well, your SUV would be worth whatever you could get for it as scrap. The Prius on the other hand…. The auto industry is probably a mixed bag in the short term as one could anticipate a few fairly rapid turnovers as the public scrambled for more efficient cars, but larger car lines would be lost. Railroads would probably be a big winner because of efficiencies. Telecom would probably do well. Long haul trucking would be toast. Big agribusiness would probably focus on “renewable energy” both because of the cost of shipping food and the value of agriculturally grown fuels. Local family farms might get a new lease on life. Organic farming in particular would flourish because pesticides would probably also be taxed heavily. Local production in general would benefit because the cost of moving goods would go up so dramatically. Urban sprawl would be reduced because commuting becomes more expensive and local farmland would again become valuable. Many national chain stores will struggle to maintain economies of scale. You better get re-acquainted with dried fruits and preserves in the Northeast.

The alternative fuel industry should get a strong shot in the arm because with the environmental costs figured in, it will better be able to compete with the economies of scale associated with gasoline distribution.

I suspect that the middle class would probably do ok under this proposal. They have a lot of long term flexibility in terms of adjusting consumption to keep overall taxes similar to what they are currently paying. The rich would get an initial windfall, but wouldn’t have the same incentive to change, so their share would move up over time. The poor would significantly pressured because they don’t pay as much income tax now, but would have to pay steep markups on things that they buy.

This is intended as a free for all. Comment on the idea generally or as I have framed it. Bring out other gotchas. Dispute my analysis. Analyze impacts to other parts of the economy. Have fun.

dcmdale

[Five Rings]

There are pollution credits available in and for various industries depending on the type of pollution, and I would think that the cost of this is already passed on to the consumer through increased pricing. I assume what you are referring to is something more directly consumer-oriented. I think the fight will be over the pricing and application of the tax. For instance, in the UK, for many years, VAT did not apply to food, books or baby items. Why those categories were selected was probably a result of interests group lobbying and a recognition that certain "basic needs" or "societal goods" should not be taxed. Similarly, sales tax is not universally applied in the U.S. either.

[dcmdale]

Originally Posted by Five Rings

There are pollution credits available in and for various industries depending on the type of pollution, and I would think that the cost of this is already passed on to the consumer through increased pricing.

I would also assume this.

Originally Posted by Five Rings

I assume what you are referring to is something more directly consumer-oriented.

Not really. The biggest difference is in scope and application. The U.S. Federal Individual Income Tax pulls in $997B / year. Federal Corporate Income Taxes are $227B / year (2006 estimated figures). I can't put my hands on any hard estimates for environmental credit trading, but the numbers I did find would seem to indicate that the economic impact would be about 1/1000 of the income tax.

I am thinking that one would still tax business and that would be passed on to consumers. (Goodbye H&R Block).

Originally Posted by Five Rings

I think the fight will be over the pricing and application of the tax. For instance, in the UK, for many years, VAT did not apply to food, books or baby items. Why those categories were selected was probably a result of interests group lobbying and a recognition that certain "basic needs" or "societal goods" should not be taxed. Similarly, sales tax is not universally applied in the U.S. either.

I think that the first fight would be just over the idea, THEN, it would be over all of the details. I really don't think that it will happen, but it is interesting to think about.

Were I a lobbyist for a food company, I certainly would be screaming that food needed to be exempt. See the comment about the impact on the poor.

[PeterGustafsson]

Hi!


DcmDale: I think that you would find a lot of interestng stuff if you did websearches on the environmental policies of European, especially North European countries.

For starters, gas costs about 7 bucks/gallon in Sweden, but the taxation on housing is much lower than in the USA. Ergo, few SUV's and trailer parks here.


Have a nice time!

Peter Gustafsson

[PeterGustafsson]

Hi!


DcmDale: I think that you would find a lot of interestng stuff if you did websearches on the environmental policies of European, especially North European countries.

For starters, gas costs about 7 bucks/gallon in Sweden, but the taxation on housing is much lower than in the USA. Ergo, few SUV's and trailer parks here.


Have a nice time!

Peter Gustafsson

[dcmdale]

Europe is a different beast than the U.S. and perhaps some of these ideas would be less radical there. A comparable proposal for Europe would seem to be replacing the VAT with an environmental tax as the VAT remains a tax on productivity.

I am aware of the gas price difference between the U.S. and Europe and it figured in my speculation about the impact of $7 gas.

[Larrison]

Hmm.. to play devil's advocate here a bit..

Don't we have roughly a tax system that is based upon pollution?

About 50% of the price of gas in the US (and 80-90% elsewhere, such as in Europe) is taxes on the gasoline. So if you use more gas, you get taxed more. More pollution= more taxes

If you have a highly efficient car you get a tax credit (there's an electric/ hybrid car tax credit on the books).

If you create more waste/ trash and fill up landfills, then you pay more in trash fees (mostly taxes from the local community). Where I live, you pay per trash bin they collect.

If I use more electricity or natural gas in my living domicle, I pay more. Most of the cost of electricity or natural gas is taxes. More energy use in living = more taxes paid. If I convert to more efficient energy usage at home (solar panels on the roof, solar water heating, etc), then there both a direct tax credit for the installation, as well as lower taxes paid in monthly bills.

If you recycle something, you get a tax credit. When I donate to a clothing recycler (Salvation Army, Goodwill industries) I get a receipt which I can use in calculating my taxes to reduce my taxed amount. If I recycle glass, aluminum, paper etc directly, I get a cash payment to reflect this. This is tax free.

And for atmospheric pollution (CO2, soot, smog) in Southern California there are both direct taxes if you are a significant producer of such (and this has been extended to local bakeries and restaurants, as well as individual cars and motor vehicles), and indirect taxes (taxes on fuel, energy, etc.). For example, if you wanted to cut your natural gas bills for heating by wood in your house, there is a tax on the wood to cover the additional air pollution caused by this. This tends to encourage people to use the most efficent form of energy.

And I will note something in passing. dmcdale noted in a gedanken if fuel prices went directly to environmental tax based " ... your SUV would be worth whatever you could get for it as scrap. The Prius on the other hand…. " Again, playing devil's advocate, I might argue that the Prius would be worth *less* than the SUV. The SUV is worth scrap value at worst. The Prius car body and gas engine would be worth about the same, varying by poundage of scrap per vehicle. But the cost and environmental impact of recyling the battery system on the Prius? Mannnnn.. right now batteries are considered hazardous wastes here, and you have to dispose of expended flashlight, calculator and watch batteries only through the local hazardous waste service. The big battery pack in the Prius is going to cost a pretty penny to dispose of..... Probably making the SUV worth a lot more in scrap value than the net value of the Prius...

[dcmdale]

Originally Posted by Larrison

Don't we have roughly a tax system that is based upon pollution?

About 50% of the price of gas in the US (and 80-90% elsewhere, such as in Europe) is taxes on the gasoline. So if you use more gas, you get taxed more. More pollution= more taxes

If you have a highly efficient car you get a tax credit (there's an electric/ hybrid car tax credit on the books).

Yep. $2K credit (as opposed to a deduction), at least thats what it was when I took advantage of it.

Gas taxes (~25% where I live) are generally designated for highway repairs and construction, but they are similar in that they are essentially charging for use of a public resource.

The practical difference between current gas taxes and what I am throwing out is one of magnitude.

Originally Posted by Larrison

If I use more electricity or natural gas in my living domicle, I pay more. Most of the cost of electricity or natural gas is taxes. More energy use in living = more taxes paid. If I convert to more efficient energy usage at home (solar panels on the roof, solar water heating, etc), then there both a direct tax credit for the installation, as well as lower taxes paid in monthly bills.

Yes. But you don't see a particular difference whether your electricity come from coal or hydro or windmills.

In some places you can purchase from "green" providers, but you typically pay a premium. That is the difference between a consumption tax and a environmental tax. The effect of the environmental tax would be to change the economics such that green electricity would be significantly cheaper which would drive more consumers to those sources and thereby driving more money into developing greener sources.

Originally Posted by Larrison

And for atmospheric pollution (CO2, soot, smog) in Southern California there are both direct taxes if you are a significant producer of such (and this has been extended to local bakeries and restaurants, as well as individual cars and motor vehicles), and indirect taxes (taxes on fuel, energy, etc.). For example, if you wanted to cut your natural gas bills for heating by wood in your house, there is a tax on the wood to cover the additional air pollution caused by this. This tends to encourage people to use the most efficent form of energy.

At a microscale, this is closer to what I am talking about.

Originally Posted by Larrison

And I will note something in passing. dmcdale noted in a gedanken if fuel prices went directly to environmental tax based " ... your SUV would be worth whatever you could get for it as scrap. The Prius on the other hand…. " Again, playing devil's advocate, I might argue that the Prius would be worth *less* than the SUV. The SUV is worth scrap value at worst. The Prius car body and gas engine would be worth about the same, varying by poundage of scrap per vehicle. But the cost and environmental impact of recyling the battery system on the Prius? Mannnnn.. right now batteries are considered hazardous wastes here, and you have to dispose of expended flashlight, calculator and watch batteries only through the local hazardous waste service. The big battery pack in the Prius is going to cost a pretty penny to dispose of..... Probably making the SUV worth a lot more in scrap value than the net value of the Prius...

Yes. The Prius battery is nasty. This would give Toyota a much better economic incentive to figure out what to do with it.

I agree with Peter that $7/gal gas doesn't end automobile traffic, but it would drive consumers away from 18 MPG transportation towards 56 MPG transportation (what my Prius got).

The proposal isn't so much about whether "some jurisdictions" are doing "some things" in this direction now (as I said, this proposal has been around for at least 35 years that I have know about it), but rather doing it at a magnitude that would drive fundamental changes in the economics.

If you read the SciAmerican "environmental issue" from a month or so ago (part of what got me thinking about this), how many technologies are essentially in limbo "until the price of gas gets to $X/gal in the U.S.?" Green sources can't compete today with the economies of scale of today's production and distribution--at least not if we continue to put a unreasonably low economic price on the use of the environment.

[Phaeton]

Highly taxing oil would be leathal to the airline industry. Not only are they struggling at the moment, but there really isn't a viable energy alternative for airplanes. What we derrive from oil is effective, extremely effective and that's why we use it.

Hysteria aside we have a finite amount of resources and trusting ourselves to find something new without incentive before a crisis happens isn't a good idea. Infinite growth cannot occur in a world with finite resources, and we're starting to see things start to deplete in a pretty major way.

A major discount for people with a system like this is tax credit for recycling, and an instutionalized sytem for reusing things. Recycling right now is rather rediculous. I can go through 6 bottles of water a day if I forget my jug and am not by any place where I can refill it.

0/6 caps I use are going to made into water bottle caps again. You could probably sterlize them and stick them right on the top, but they'll go through a process that leaves chemical waste to turn them into something else ineffiiceiently.

Dead biotic things want to become biotic things again. Dead computers and manufactured goods want to go back and become more manufactured goods. There are millions of new car bodies made of new material when old ones could be melted down into new ones, or reoutfitted. Hell, somone could even keep the same body for a while, (that's not why people get new cars most of the time) and stick in new parts, like what I do with computers, upgrade. I've had the same case for years now. We just need to standardize engines to a degree.

Everyone can take something out of the economy with the understanding that at the end of the use of the resource, it has to be returned to the economy or made up for in cash. If I want to junk a car chasis, that's my right but I'll be taxed heavily for it.

Recycling now is a joke. Arguably, the gas to get things from point A to point B does more harm than the water bottles and paper they pick up after the chemical processes and gas emmisions. It needs an overhaul.

(What ever happend to the "Steady-State Economy" idea. Never see it anywhere anymore)

[TrainingDummy]

Originally Posted by dcmdale

I agree with Peter that $7/gal gas doesn't end automobile traffic, but it would drive consumers away from 18 MPG transportation towards 56 MPG transportation (what my Prius got).

Why "got"? Did you get rid of it?

[dcmdale]

Originally Posted by TrainingDummy

Why "got"? Did you get rid of it?

It lost a battle with an 18-wheeler.

Best car I have ever owned. I was a bit shocked when the insurance payout came to considerably more than I had originally paid, but when I went to the dealer to buy a new one and they told me about an 18 month wait...

[TrainingDummy]

Which one, Optimus Prime? I bet he would destroy a Prius!

[RoninX]

Originally Posted by Larrison

If you have a highly efficient car you get a tax credit (there's an electric/ hybrid car tax credit on the books).

If you create more waste/ trash and fill up landfills, then you pay more in trash fees (mostly taxes from the local community). Where I live, you pay per trash bin they collect.

If I use more electricity or natural gas in my living domicle, I pay more. Most of the cost of electricity or natural gas is taxes. More energy use in living = more taxes paid. If I convert to more efficient energy usage at home (solar panels on the roof, solar water heating, etc), then there both a direct tax credit for the installation, as well as lower taxes paid in monthly bills.

If you recycle something, you get a tax credit. When I donate to a clothing recycler (Salvation Army, Goodwill industries) I get a receipt which I can use in calculating my taxes to reduce my taxed amount. If I recycle glass, aluminum, paper etc directly, I get a cash payment to reflect this. This is tax free.

One problem (for the consumer) in using tax credits is that they seem gimicky, like a sale rebate check that 50% of people never send in (which of course those companies count on to run the sale). Any rebate immediately casts the connotation of a marking ploy - thus casting the whole enterprise in a nebulous shadow of consumer exploitation.

A direct tax on polluting "agents" benefits the consumer immediately, assuming they choose to choose to avoid said agent. Given the image problems of tree hugging and economic impracticallity that most "green" energy sources etc have or are encountering they should avoid the "scam" label that rebates conjure. IMHO.