The Tax The GOP Needs, Not The One It Wants

Brendon Steele Senior Manager of Stakeholder Engagement, Future 500
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Here’s a riddle for the Republican leadership of the 114th Congress: how can you lower tax rates, grow American manufacturing, shrink government, and earn new voters in 2016, all in a package that would be impossible for President Obama to veto?

The answer is unorthodox — seemingly heretical — but sound: a revenue-neutral tax on carbon pollution. While the term sounds like a nefarious scheme concocted by a bored federal bureaucrat, it is a refreshingly simple idea. Revenue-neutrality means that every dollar of carbon tax revenue is returned to taxpayers, by cutting other taxes, or through a monthly dividend check. Government does not keep the money. All you have to do is choose which taxes you want to cut with the revenue.

Why replace one tax with another? Right now, our biggest sources of tax revenue come from the income and payroll tax — which disproportionately hurt wage workers — and the corporate income tax, which hurts businesses small and large alike. These taxes harm our prosperity.

Studies from MIT, Brookings, and others show cutting these distortionary “taxes on prosperity” in favor of a carbon tax produces lasting economic benefits. For example, a recent study from Regional Economic Models Inc. found a “tax-and-dividend” approach will cut U.S. carbon emissions in half within 20 years, while adding 2.8 million jobs and avoiding 230,000 premature deaths due to improved air quality.

While carbon reduction might be of little interest to climate-skeptic conservatives, it has an ancillary effect they should note: it is a shrinking tax base. Right now, as the economy grows, politicians get an automatic tax increase. With a revenue-neutral carbon tax, the economy eventually decarbonizes — the tax base gets smaller. Revenues decrease. Taxes are naturally cut. To make up the difference, politicians must vote to cut expenditures or raise other taxes, making their choices transparent and accountable to voters.

Not only does steep carbon reduction obviate the need for future EPA carbon regulations, it is achieved while shrinking the size and scope of government, and spurring robust economic growth.

Far from punishing energy use, a carbon tax incentivizes innovation and energy productivity. Lower prosperity taxes mean people — not bureaucrats — choose how to best spend their hard-earned income, to benefit themselves and their families. This creates a virtuous circle as people choose options that drive down carbon and drive up energy productivity, leaving them with more wealth at the end of the day. The market responds naturally to low-carbon demand — no expensive debacles like Solyndra.

In addition, carbon border adjustments would apply the tax to any imported foreign good, and rebate the tax for any exported American good. That way, American goods compete on a level playing field. In fact, as U.S. electricity generation is cleaner compared to China and India, a carbon tax puts U.S. manufacturing at a competitive advantage: American goods would have a lower tax burden compared to Chinese goods, making their prices more attractive to domestic consumers. Jobs insource, not outsource.

And border adjustments send a natural market signal to China and India to clean up their act: the longer they avoid carbon pricing themselves, the more their exports will be disadvantaged in U.S. markets, harming their economic viability. This is done without complex UN negotiations or global government; the market compels climate friendly action in other countries.

Despite these clear benefits, Republicans continue to levy two tired arguments against a revenue-neutral carbon tax. Both are patently false.

The first is that it is an unrealistic idea, which the left would never go for. This is wrong on two counts: not only are environmentalists like James Hansen and Citizens Climate Lobby embracing revenue-neutrality, progressive British Columbia pioneered a strictly revenue-neutral carbon tax in practice. Initially unpopular, once British Columbians saw the benefits — the province has the lowest personal income tax rate in Canada and one of the lowest corporate rates in North America — they have rallied for it time and again.

The GOP need not worry about corporate opposition, either. Companies from Walmart to Microsoft expect federal carbon pricing, and oil giant ExxonMobil even advocates a carbon tax.

The second argument is that global warming is not real or is insignificant, therefore policy is unneeded. However, the myriad benefits of a revenue-neutral carbon tax are just as real even if one thinks climate change itself is a total hoax. In addition, the voters the GOP desperately needs to attract — Millennials, women, minorities, and swing voters — believe it is real. Even if climate change may not be their top priority, these voters demand action. They support President Obama’s Climate Action Plan, because it is the only plan on the table.

While it is comforting for the GOP to believe voters rebuked President Obama and the progressive agenda — climate included — in 2014, how many times has Congress changed hands since the ’94 Republican Revolution? The GOP faces a systemic demographic slide, masked by 2014’s low voter turnout and right-leaning crop of Senate races up for election. Already the Democrats command a “blue wall” of 257 electoral votes that no Republican presidential candidate can realistically hope to win, with Virginia’s 13 electoral votes slipping into it.

Now is a unique time for the GOP. If the party thinks creatively, it can find ideas — like a revenue-neutral carbon tax — that advance Republicans’ core values in ways that also appeal to Democrats, broadening the party’s appeal into the “blue wall” before 2016.

If the party follows its current course, defining itself by what it opposes rather than by what it proposes,starting in 2016 it will be increasingly difficult for it to gain control of the presidency, let alone the Senate. Future Democratic administrations, with no choice but executive action, will continue unchecked down the EPA command-and-control path — if the GOP does not offer a better alternative.

In short, the alternative is not business-as-usual now, so as to achieve victory later; it is a slow lurch to irrelevancy.

So Mr. Boehner and Mr. McConnell, which would you rather tax: America’s prosperity, or carbon pollution?

Brendon Steele is a Senior Stakeholder Engagement Manager at Future 500, a global nonprofit specializing in stakeholder engagement and building bridges between parties at odds to advance systemic solutions to urgent sustainability challenges.