In establishing this blog, one of the aspects of taxation that I wanted to consider is the interrelationship between tax policy decisions and support for a sustainable democracy. In that light, I have argued against ideological tax cuts--i.e.,the current situation in which Congress and the White House consider tax cuts a per se good whether the budget is in surplus or deficit, whether the economy is growing well or in recession, and whether inequality is increasing or decreasing. We should not disregard the centrality of the tax system in making government work. Taxes fund government and the way we tax defines how members of the society view their relationship with each other and with their government.
Lately, commentators have begun to address an interesting aspect of tax as a defining institution of society by looking at tax provisions that impact the environment. Roberta Mann recently published a paper on Waiting to Exhale? Global Warming and Tax Policy that considered in particular our archaic system of incentives for natural resource exploitation left over from a period when Americans tended to view the continent as a vast table of goods laid out for our taking. In Americans and Their "Wheels": A Tax Policy for Sustainable Mobility, Mona Hymel and Beth Wolfsong "advocate for the development of tax policies that address the destructive environmental realities of continued and increasing fossil fuel usage." They argue that Congress should develop environmentally friendly tax provisions but that those provisions will have "to consider not only the economic [and environmental] impact, but also the social impact of tax structures and other laws that influence behavior." Id.
Craig Hanson and David Sandalow have produced a policy brief for the Brookings Institution and World Resource Council that provides a good overview of the possibilities for making the tax code more environmentally friendly. See Greening the Tax Code. They discuss current tax expenditures related to the environment, like the archaic percentage depletion allowance that subsidizes oil companieseven though during periods of skyrocketing prices and profits. (See, for example, this LA Times story about oil companies' record profits during this season of high gasoline costs.) Hanson and Sandalow note that eliminating the oil depletion allowance from 2004 to 2008 would have saved about $900 million for federal coffers. Even larger tax expenditures support extractive industries' expensing of exploration and development costs--$17 billion over five years. These extractive industry provisions come out losers on both fairness and environmental grounds: one type of industry is subsidized while others are not, extraction of virgin materials is favored over environmentally better recycling, and "taxpayers can be left holding the bill for cleanup at these sites after companies have used these tax breaks to enhance returns." Why hasn't Congress ended such a egregiously misguided boondoggle? Probably we need not look further than the extraordinary wealth, and hence power, of the oil lobby in Washington, in spite of vigorous lobbying by national environmental groups. Thus, this story is a perfect illustration of the intricate meshing of tax policies and the institutions of democracy.
Hanson and Sandover also mention the tax advantages of heavy SUVs, covered in this recent A Taxing Matter posting. They note that eliminating this irrational favoritism for SUVs altogether would save the federal fisc $700 million over five years. There is a glimmer of hope for the intermeshing of tax and democracy in this area--the vocal public disgust with the publicity about dentists who "expensed" $100,000 SUVs led Congress to cut back the SUV tax break in the 2004 Jobs Act. That says that Congress can listen if the public gets fired up enough to get into the fray.
Hanson and Sandalow also discuss the pros and cons of pollution taxes as a method of disincentivizing polluting activities and, at the same time, creating a revenue stream that can be targeted to important social measures. The big drawback, as with any excise or consumption tax, is that such taxes are regressive. Pollution taxes would be most effective in connection with other reform proposals that reduce regressivity. hanson and Sandalow suggest, for example, a carbon tax whose revenues could finance reductions in the federal payroll tax that falls harshly on lower income earners (and not at all on investment income). They also appear to support uses of pollution taxes to fund other tax reform packages--such as a shift to a consumption tax or the complete elimination of taxes on wealthy corporate owners' dividend income. Those proposals appear less worthy of support, since they both would increase regressivity and thus exacerbate the income inequality that, in my view, poses a significant threat to sustainability of democratic institutions.
I am pleased to see tax experts focussing on these issues. In my clearly unscientific surveys of ordinary Americans (questions asked in airports, public assemblies and anywhere else I mingle with people I do not know well), I have found that most are utterly ignorant of the fact that major oil producers get a write-off of part of their income through the oil depletion allowance. I also have found that the vast majority care about environmental issues and want Congress to protect natural resources such as the Arctic National Wildlife Refuge. If the American public becomes more aware of the ways in which the tax code currently favors environmental degradation over environmental sustainability through commentary like that provided by Mann, Hymel, Wolfsong, Hanson and Sandalow, perhaps we can expect Congress also to pay more attention to the impact of tax on the environment.