The Environmental Tax Shift

A new concept based on simple economic principles holds the possibility not only of reducing the tax burden on working people, but of increasing environmental protection without harming the economy. It is called the "environmental tax shift." By raising taxes on things we want less of—like pollution and waste—we’re able to cut taxes on working men and women. In this way, the country can simultaneously strengthen its economy and clean its air and water.

"It’s not a revolutionary idea to tax activities that have a social cost borne by others," says Henry J. Aaron, a senior fellow in economics at the Brookings Institution, a public policy center. "Economists think those are the best kind of taxes."

Lots of others agree. "Taxing the society-wide drip and hiss of pollution would allow governments to slash charges on profits and paychecks, charges that sap enterprise and work," says the group Northwest Environment Watch in its book This Place on Earth 2001.

Could it Happen Here?

Sound like a fantasy? In the United States, that’s exactly what it is. Although efforts to study or implement modest environmental tax shifts have cropped up in a handful of state legislatures in recent years, none have seen much success.

Elsewhere in the world, however, the concept has been spreading rapidly. Nine Western European countries have implemented environmental tax shifts recently, mostly as a means to reduce air pollutants like sulfur dioxide and carbon

dioxide. And some have gone even further, fighting waste by taxing landfill space or encouraging conservation by taxing electricity and water. All returned the savings to the economy by cutting personal income taxes, social security, or both. So far, the experiment has been successful, says J. Andrew Hoerner, director of research for the Center for a Sustainable Economy. "In 44 economic studies of environmental tax reform in Europe, we basically concluded that the impact on the Gross Domestic Product is positive, the impact on employment is positive and the effect on emissions is to reduce them," says Hoerner.

At home, things are moving slowly, mostly because of the general anti-tax sentiment in North America and the inertia built into the current system, says Northwest Environment Watch founder Alan Thein Durning. Still, Durning is confident that progress is being made. "We can’t point to any laws that have been enacted, but we keep getting closer," he says, noting that while the idea was relatively unknown just a few years ago, officials are now at least familiar with it. "This campaign involves a lot of planting seeds and a lot of waiting," he says, adding that in a crisis officials will have to look to a tax shift for new sources of revenue.

Still, there are many who say the concept is no panacea. "The environmental tax code is no silver bullet because there is no agreement on how much damage certain pollutants do," says Jerry Taylor, director of natural resource policy for the libertarian CATO Institute. Moreover, Taylor says, such a code would "hit poor people the hardest," since they would be least able to afford the increased energy cost from taxing gasoline and power plant pollutants. And the system would create dozens of hidden taxes that would be difficult to keep track of and easily manipulated by industry lobbyists, adds the institute’s Chris Edwards.

While tax-shifting advocates agree that energy taxes disproportionately impact the poor, it would not be difficult to ease that burden using the revenue generated from the taxes themselves, they say. For instance, a portion of the revenue could go to helping poor people upgrade energy efficiency, says Hoerner.

And Durning says legislators who are more interested in their constituents" penchants for SUVs than the poor sometimes use the argument as a red herring. "I believe the biggest obstacles to an environmental tax shift are ignorance and force of habit," he says.