Tax Shifting

by William Yeatman on April 25, 1998

in Small business

One of the policy options for reducing greenhouse gas emissions that is beginning to receive a lot of attention is tax shifting. The idea behind the proposal is that governments shift taxes away from “goods” (i.e., labor and investment) and begin taxing “bads” (i.e., pollution and energy use). The Clinton administration and others who wish to control energy use have seized upon this tax proposal as a nearly cost-free way to reduce energy use. States such as Vermont, New England, Massachusetts, Minnesota, and New York are considering policies of this type.

A study done in June 1997 by the Tellus Institute analyzes the economic affects of tax shifting on the state of New York. It is a good preview of how these types of policies may be sold to taxpayers. The study treats tax shifting optimistically stating that “There need not be a trade-off between environmental policies and economic well-being.” According to the study, “Ecological tax reform is a policy strategy in which this double goal is built by design.”

The authors concede, however, that some people will be hurt by the new tax policies. Those who depend on energy intensive industries may find themselves in economic straits. “Thus,” says the authors, “concrete tax reform policy would require provisions to ensure that businesses that would be hard hit by simple tax shifting, and the employees of these businesses, would be assisted in this transition, through measures such as targeted tax credits, subsidies for energy-efficiency investments, and retraining assistance for workers. Such measures could be focused on communities that depend on energy-intensive industries.”

But such adverse effects should not be cause for undue alarm. Structural change is natural in a capitalist economy. Unlike the messy, unpredictable changes that occur in a capitalist economy, however, “ecological tax reform could help give direction to this process,” say the authors. The study also touts the advantages of tax shifting for New Yorks industrial planners. State industrial policy has become a hodgepodge of tax credits, infrastructure services and other targeted policies designed to lure businesses to the respective states. The study recommends that states adopt ecological tax reform as a way to simplify existing tax systems and eliminating what many economists see as counterproductive competition between states.

The study analyzes three levels of carbon taxes: $10, $30, and $50 per ton of carbon dioxide (CO2). The taxes would be fully implemented by 1997, would be assessed on carbon content of fossil fuels and at first point of entry to the state. The study also analyzes two policy scenarios: Scenario I returns the entire carbon tax to taxpayers through reduced traditional taxes. Scenario II uses one-quarter of the carbon tax revenue to subsidize energy efficiency investments while the rest is returned taxpayers.

Coal would experience the largest price increase due to a carbon tax. A $10 carbon tax would increase the price of coal by $20.82/ton, $62.46/ton under a $30 tax and $104.09/ton under a $50 tax. Gasoline prices would increase by $0.10/gallon, $0.31/gallon and $0.52/gallon for the respective tax levels and natural gas prices would increase by $0.58/mcf, $1.74/mcf and $2.90/mcf respectively.

The authors claim that additional energy reductions can be achieved through the reinvestment plan under scenario II. Under the $10 tax a 25 percent reinvestment would triple energy reductions relative to no investment. Under the $30 tax energy reductions would be 90 percent higher while under a $50 tax energy reductions would be 55 percent higher.

Finally, the authors claim that ecological tax reform would lead to net job creation. They reason that taxing energy use would discourage capital-intensive production and would encourage labor-intensive production, increasing labor demand. Furthermore, non-energy, labor-intensive products (such as services) are generally produced within the state while energy-intensive products are more often imported into the state. Ecological tax reform would prevent money from leaving the state. The study, Ecological Tax Reform: Carbon Taxes with Tax Reductions in New York can be obtained through the internet at for $25.

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