Should the U.S. Consider a Modest Emissions Fee as Part of a Strategy to Lower Marginal Tax Rates?

ACEEE is preparing a series of working papers on how energy efficiency issues might be addressed as part of tax reform.   We call them working papers because we solicit feedback and comments on these drafts, so that our analyses and proposals can be refined.   We plan to release final versions of these papers as part of a larger report later this year. 

In this paper, we discuss reducing marginal tax rates, which could be offset by some additional revenue. Our present tax system largely taxes things that result from productive economic activity— wages, non-wage income, and corporate profits. An alternative is to collect some revenue from things that produce negative economic effects, such as cigarettes, alcohol, and as proposed in our paper, pollution. In the economics literature, these are now commonly known as Pigovian taxes. Many prominent economists and politicians have spoken in favor of using Pigovian taxes to regulate pollution. We are not suggesting that all revenues be collected from Pigovian taxes, but instead that an increased portion of the current tax burden come from these taxes. We start from a proposal examined by the Bipartisan Policy Center Debt Reduction Task Force and look at further details, such as how much tax rates could be lowered, and the impacts of the pollution fees on emissions and investments in low-emissions technologies. We also examine concerns that any new tax or fee would be easy to increase in the future and suggest ways to address this concern.

Comments and suggestions can be sent to taxreform@aceee.org. All comments will contribute to developing our working papers and will not be shared as public information.