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The Carbon Tax War



Annette Nellen

Well, it’s not a carbon tax war yet as neither side of this issue in Congress seems to have it as their number one issue. A carbon tax aims to increase the cost of using one type of fuel that leads to greenhouse gas (GHG) emissions and climate change. There are other types of GHG emission, but per the Environmental Protection Agency (EPA), carbon emissions represent 81% of the total.

There are negative externalities of using carbon fuels (gas and coal for example) in that the emissions harms the environment and leads to climate change. To help address these costs, the cost of the carbon producing items needs to be increased, thus, the call for a carbon tax.

While coal and gas (including natural gas) are key carbon emissions, a carbon tax would need to be imposed on each of these types of emissions to truly be a carbon tax. Sometimes, a proposal only calls for imposing it on gasoline by increasing the existing tax on this fuel. This would be easier as the gasoline excise tax already exists, but it then ignores the negative externalities of other sources of GHG emissions.

There has been increased attention on a carbon tax recently due to presidential candidate Senator Bernie Sanders talking about it. These discussions tend to be very narrow and he seems to focus on a carbon tax being the only way to address climate change. I recall in a debate with Secretary Clinton that he asked her: Do you support a carbon tax or not?

There are other ways to address the negative externalities of GHG emissions. This includes fees, penalties for excess emissions, education, and support for use of alternative energy sources that do not produce GHG emissions.

There has been some recent activity in Congress and the White House:

  • ●  H.Res. 767 passed in the House on 6/8/16 to express the “sense of Congress that a carbon tax would be detrimental to the United States economy” and “opposing the President’s proposed $10 tax on every barrel of oil.”
  • ●  President Obama proposed the $10 per barrel fee on oil to be imposed on oil companies in a 2/4/16 Fact Sheet on his 21st Century Clean Transportation System. The plan is designed to encourage investment in clean transportation options that can also help reduce what President Obama refers to as a hidden tax due to congestion that annually “costs families $160 billion and businesses almost $30 billion.” 
  • ●  S. 1548 (114th Cong), American Opportunity Carbon Fee Act, would “impose fees on: (1) fossil fuel products producing carbon dioxide emissions, including coal, petroleum products, and natural gas; (2) fluorinated greenhouse gases; (3) emissions of any greenhouse gas from any greenhouse gas emissions source; and (4) methane emissions.” In addition, this proposal: “Reduces the maximum income tax rate on corporations to 29% of taxable income over $75,000. Allows a new carbon fee offset tax credit for the lesser of: (1) 6.2% of earned income, or (2) $500.” 

Issues that need to be addressed in a carbon tax include:

  • Equity—the tax is regressive in that it represents a bigger percentage of the income of a low-income taxpayer relative to a high-income taxpayer. The credit in S. 1548 addresses some of this concern.
  • Simplicity—how can such a tax be designed to be simple rather than add a new layer of complexity onto what is already a complicated tax system?
  • Fit—does the tax best fit the problem? For example, only taxing gasoline doesn’t address the problem that other fuels also produce GHG emissions.
  • Alternatives—what alternatives exist? In addition to the ones I mentioned above, the current tax provisions incentivizing production of carbon fuels should be cut back.
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Annette Nellen, CPA, Esq., is a professor in and director of San Jose State University’s graduate tax program (MST), teaching courses in tax research, accounting methods, property transactions, state taxation, employment tax, ethics, tax policy, tax reform, and high technology tax issues.

Annette is the immediate past chair of the AICPA Individual Taxation Technical Resource Panel and a current member of the Executive Committee of the Tax Section of the California Bar. Annette is a regular contributor to the AICPA Tax Insider and Corporate Taxation Insider e-newsletters. She is the author of BNA Portfolio #533, Amortization of Intangibles.

Annette has testified before the House Ways & Means Committee, Senate Finance Committee, California Assembly Revenue & Taxation Committee, and tax reform commissions and committees on various aspects of federal and state tax reform.

Prior to joining SJSU, Annette was with Ernst & Young and the IRS.

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