Carbon tax could provide White House with missing link on tax reform

You’ve heard it all before: the U.S. tax code hasn’t been updated since 1986; it’s riddled with loopholes, giveaways and inefficiencies; our corporate tax rate is the highest in the developed world; companies spend billions of dollars or relocate their headquarters overseas just to avoid the tax morass; we’re past due for an update; and our economy is sorely in need of a pro-growth jolt. Politicians of all parties agree on all of this. Reform is coming, and soon, we’re promised. 

That’s been the steady drumbeat since the peak of the recession nearly a decade ago. So what’s the holdup?

{mosads}Any attempt to lower rates substantially creates a revenue hole. How to deal with that hole is a perennial sticky wicket. Congress has put forward one idea—a border-adjusted tax (BAT) that would eliminate the benefits of moving companies overseas and bring back billions of dollars stranded in offshore accounts. Articulated in last year’s “A Better Way” report from the House GOP’s Task Force on Tax Reform, the BAT reorients the code toward a destination-based cash flow tax, removing what sometimes are characterized as self-imposed penalties for exports and subsidies for imports. A few supporters have marketed the BAT as “a tax on the trade deficit.”

Opposition to BAT, however, has been fierce. Retailers, apparel-makers, automakers, and other import-heavy companies—think Wal-Mart, Nike, Autotrader and J.C. Penny—have raised serious concerns that the BAT will make it too expensive for Americans to purchase common goods and services. Conservative interest groups like Americans for Prosperity are waging an all-out campaign against the proposal. There’s substantive concern that the tax-reform debate may go the way of health care, with a divided GOP unable to reach agreement and legislate a solution.

Here’s where it gets interesting: earlier this week, reports emerged that the administration’s tax team is considering ideas like a value added tax (VAT) and a carbon tax as alternative ways to finance tax reform. That’s not to say these instruments are a foregone conclusion. For starters, White House spokeswoman Lindsay Walters declared “neither a carbon tax nor a VAT are under consideration.”

If the White House actually were considering such contentious revenue options as a VAT or carbon tax, there would be clear motivation to signal otherwise. Ronald Reagan detested the VAT for being a hidden tax, easily increased without alerting taxpayers. The U.S. House last year passed a resolution against carbon pricing.

Even so, if the administration is serious about getting tax reform over the finish line, these would be two pretty good bets to raise revenue.

In 2010, inspired by a heated battle over the debt ceiling, deficit reduction was the cause du jour. While the debate ultimately resulted in budget sequestration, as articulated in the Budget Control Act of 2011, a number of commissions, task forces and members of Congress assembled proposals to improve fiscal discipline and reform the tax code. Of the seven most prevalent proposals, four included revenue from either a gas tax or carbon price; two introduced a VAT; and one considered a carbon tax, though ultimately did not include it. When serious people consider serious measures to reform the tax code and address the deficit, carbon pricing and a VAT are the two go-to instruments.

A carbon price, though, fits well into the administration’s other plans. As part of the campaign, President Trump promised again and again a new way forward on regulation and energy. In an executive order last week, Trump ordered the substantial rollback of a number of regulatory policies to address carbon emissions, on top of a requested 31 percent cut to the Environmental Protection Agency’s budget. More regulatory rollbacks can and should be done, as they serve as the least efficient way to solve the carbon-pollution problem. But all these rollbacks are only half the battle.

If this year’s health-care debate proved anything, it’s that efforts to roll back Obama-era policies are highly susceptible to political backlash. The environmental movement has demonstrated its ability to turn opposition into highly visible protests through campaigns over the Keystone XL and Dakota Access pipelines. Pairing permanent removal of the EPA’s authority to regulate carbon emissions with a transparent carbon price might take the fire out of potential protests, give the GOP the upper hand in a major environmental-policy fight and bring moderate Democrats into the fold on tax reform. 

Moreover, carbon pricing can raise serious revenue. A 2013 estimate from the Congressional Budget Office suggested that a carbon tax could raise $1.2 trillion over 10 years – beating the proposed BAT in revenue estimates and financing even deeper cuts to the corporate income tax. R Street research suggests that even a relatively modest carbon price actually could replace corporate taxes entirely, turning the United States into the most competitive investment climate in the world.

Tax reform is long overdue, but bipartisan agreement on the need for reform hasn’t yielded a workable proposal. White House leadership on carbon pricing may prove to be the missing link.

Catrina Rorke (@CRorke) is a senior fellow with the R Street Institute (@RSI), a nonprofit that supports limited government in Washington, D.C.

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