How much tax reform could carbon fund?

Yesterday, the Big 6 released their proposed framework for tax reform, including big rate cuts for corporate and personal income. Details on how this array of cuts and reductions will be paid for are mostly absent. That absence probably betrays a discomfort about the lack of available options for either eliminating popular tax breaks or raising alternative sources of revenue.

Even though reports hold that the conversations going on now do not include a carbon tax, one ought to be part of the conversation. As legislators and advocates try to craft an acceptable bargain that can get through a fractious Congress, levying a meaningful price on carbon would draw the attention of Democrats. It would also go a fair bit toward funding the personal and corporate income taxes that the Bix 6 have in their sights.

How much money is on the table? The numbers are in the trillions. The chart below shows the revenue that a prospective carbon tax would raise, across a wide range of carbon tax rates, over the first 10 years.  Thanks to a new modeling tool from Marc Hafstead at Resources for the Future, we can get a rough estimate of new revenues from a carbon tax on fossil fuel use. The following chart shows the first 10 years of revenue from a carbon tax that would start from 10 dollars per ton (of CO2) to 50 dollars per ton and increase at a rate of 2 percent above inflation.

In this chart, the gross revenue has been scaled down by 25 percent, an accounting practice that a new carbon tax would encounter at the Congressional Budget Office to account for how the incidence of the carbon tax would decrease revenues from other taxes (a haircut that is distinct from any rate adjustments due to a tax swap). Based on decisions made by Congress, however, the net carbon tax revenue could be higher if the prospective carbon tax was levied on industrial sources of greenhouse gas emissions as well, as this model only calculates revenues for fossil fuels.

The main point here is that a carbon tax in the neighborhood of $25 per ton would unlock just about a trillion dollars of revenue to fund a tax reform package. With trillions of dollars of cuts to fund, legislators should stop looking for change in the couch and see what is coming out of exhaust pipes.