Carbon Tax: Why Republican Support For a Carbon Tax Is a Bad Idea

Republican elites have been learning to stop worrying and love the carbon tax. Last week, former Congressman Bob Inglis of South Carolina announced his support for a revenue-neutral carbon tax. Inglis joins notable economists like Greg Mankiw and Art Laffer on the growing list of Republicans who support a carbon tax. Even Grover Norquist, legendary as liberals' bête noir of anti-tax zealotry, has said that a revenue-neutral carbon tax would not violate a “no new taxes” pledge. Despite the growing support, a carbon tax is fiscal fool’s gold, relying on naïve expectations of how Washington, D.C. translates policy into laws.

The conservative argument for the carbon tax is that its revenue could be used to cut taxes on income and capital gains. The carbon tax would be better than these because it is a Pigovian tax, which is economic jargon for a tax that raises the cost on something that damages society to account for the price of its damages. Since carbon emissions lead to pollution, and pollution costs society money to clean up and pay for the health care of those who it harms, taxing carbon is said to be a win-win since it would reduce these problems while the economy reaps the growth benefits of income tax cuts.

This argument makes a lot of sense on the economic merits, but it’s unrealistic to assume that a carbon tax would be implemented like this. Unfortunately, laws aren’t made in a technocratic utopia where economic wise men sit around and maximize productivity while minimizing externalities. Instead, our laws are made by Congress, an institution where political reality always trumps economic theory.

Even the simplest, most obvious technocratic fix — calculating Social Security cost-of-living adjustments using the more accurate Chained CPI measure — has no chance to prevail against electoral calculation, which in that case shows that Americans like having cost of living calculated inaccurately so long as it gets them more money.

The politics of sin taxes, whether on cigarettes, alcohol, or carbon, all but guarantee that such a tax will not be revenue-neutral and will gradually increase well beyond its original levels. Because these taxes only effect a small segment of the population, politicians can increase them without fearing the electoral backlash that accompanies increasing taxes that most Americans have to pay, such as the payroll or gasoline tax. Adjusted for inflation, the average tax on a pack of cigarettes has increased from 37 cents in 1990 to $1.51 in 2013. Although this trend is not universal, with the tax on beer falling 63% since 1970, the pattern holds for most sin taxes on the federal and state level so even if Republicans can get a revenue-neutral carbon tax, chances are it won’t stay that way for long.

A carbon tax also creates a cruel policy paradox, because while its economic benefits derive from reducing carbon emissions, the government’s balance sheets depend on the taxes from current emission levels. If a revenue-neutral carbon tax were successful at reducing emissions, either the deficit would increase, the income or capital gains tax cuts would need to be reversed, or the carbon tax would need to be increased. Increasing the tax soon runs into a problem of diminishing returns, where the tax eventually becomes so burdensome that it radically distorts economic behavior as companies put money into otherwise unprofitable ventures in order to reduce their tax liability.

Supporters of the carbon tax like to promise major political benefits, particularly among the younger voters and educated professionals. This argument reflects the disconnect between the priorities of economists and political pundits and the desires of average voters. According to data from the Pew Research Center, 52% of Americans view reducing global warming as a priority. While this seems like a large number at first glance, it pales compared to the 86 and 70% support given to strengthening the economy and improving education. This means that the political upside to a carbon tax is minor, and is outweighed by the damage it would do to the GOP in coal-producing states like West Virginia.

You don’t need to be an anti-taxation hardliner to oppose a federal carbon tax. Though the idea is gaining traction, both the economics and politics of a carbon tax are losing issues for the Republican Party, and conservatives should retain their traditional skepticism of new taxes.