The Greening of the Tax System

Rising concern about the environment and selective public acceptance of new taxes have fostered new interest at both the state and federal levels in using the tax system to address environmental problems. Florida has a new tax to discourage the use of non-recycled or "virgin" newsprint. In Minnesota and Washington laws were enacted last year imposing high user fees on agricultural chemicals that contaminate groundwater supplies. On Capitol Hill new taxes have been proposed that are aimed at reducing carbon dioxide emissions by cars.

The idea of using taxes and special fees (or "green taxes") to protect the environment is not new. What distinguishes recent environmental taxes from such long accepted measures as container deposits and waste disposal charges is their broader scope and potentially profound ramifications. In an age of global warming, ozone layer depletion, and a host of more local environmental disasters, scientists are continually discovering new ways in which everyday consumer and industrial activities hurt the environment. Short of draconian regulatory measures, the best way to discourage these activities is to make them expensive.

Green taxes exist in a variety of forms. Charges can be levied on products that cause environmental damage in their manufacture or use. Effluent taxes can be imposed on polluters according to the amount of harmful material they discharge into the air or water. Less directly, tax differentiation -- that is, treating some enterprises differently from others under the tax code -- can eliminate tax assistance to environmental offenders and reward environmentally beneficial behavior.

Green taxes give legislators and policymakers a powerful instrument for environmental protection that supplements existing regulatory strategies. While regulatory mechanisms are used by government to lessen environmental damage by restricting or banning certain products and activities, green taxes seek to achieve the same goals through economic incentives The popularity of this approach to environ mental problems has led many European nations to enact green taxes in recent reforms of their tax systems.

Nowhere is the need for tough green taxes more evident than in the area of transportation. Since the first Clean Air Act became fully effective in 1970, efforts to reduce auto pollution have been enormously successful. But today, with 139 million cars in the United States and over a trillion and a half miles being driven ever) year, air pollution remains a major problem. Particularly worrisome is the health threat posed by ozone, a gas formed when hydrocarbons and nitrogen oxides -- two byproducts of gasoline combustion -- mix together in sunlight. Ozone can damage the respiratory system, aggravate heart disease, and reduce resistance to colds and pneumonia. In major cities such as Los Angeles and New York, minimum ozone standards established by the Environmental Protection Agency (EPA) are routinely exceeded, and with traffic congestion worse than ever around the country, the air in an estimated 382 counties -- home to half of all Americans -- is now considered to be unhealthy to breathe by the American Lung Association due to high ozone levels.

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On top of this long acknowledged menace has come a new environmental peril associated with cars: carbon dioxide emissions that cause global warming. Although the United States has only 5 percent of the earth's population, it contributes an embarrassing 25 percent of carbon dioxide released into the atmosphere worldwide. Cars and light trucks account for a little less than a fifth of U.S. carbon dioxide emissions, or 4 percent of the world's total. Don't ask Detroit to solve the greenhouse problem, automakers say, because the automobile carbon dioxide contribution is negligible. But to environmentalists, cars are the best possible place to begin the crusade against global warming. Environmentalists point out that light vehicles are the single greatest user of fossil fuels in the United States, emitting 200 million metric tons of carbon dioxide per year, more than is emitted from all of Africa. They also argue that greenhouse gases come from many different sources and that any program to slow global warming must consist of numerous small measures.

Environmentalists bolster their case for going after car emissions with simple arithmetic. The June 1988 Toronto Conference on the Changing Atmosphere and subsequent international meetings called for a 20 percent reduction in carbon dioxide emissions by 2005. To achieve that goal, all industrialized nations, including the United States, will have to find ways to cut emissions. Eventually, the United States must take measures to reduce automobile emissions. Yet with transportation experts predicting that Americans will be driving many more miles by the year 2005, it would require a 20 percent improvement in fuel economy levels just to hold carbon dioxide emissions at their current level. Either Americans must drive less, or the cars and light trucks they own must become more efficient.

Green taxes can affect both driving habits and fuel efficiency. One approach would raise fuel efficiency standards for cars and light trucks and increase the penalties, in the form of "gas guzzler" taxes, that violators must pay. The second is to discourage driving by raising taxes on gasoline.

Boosting fuel efficiency is the most promising way to cut carbon emissions. According to an Environmental Protection Agency study based on 1985 data, an improvement of one mile per gallon in the fuel economy of American cars would have reduced carbon dioxide emissions by 9 million metric tons. Globally, the same improvement would have reduced emissions by 40-50 million metric tons, cutting worldwide greenhouse gas output by 1 percent. Raising the world's fuel economy to 50 miles per gallon by 2025, says the EPA, would reduce global warming by 5 percent.

To promote more fuel-efficient cars, environmentalists want to raise the federal mileage standards for automobiles from today's 27.5 miles per gallon (MPG) to 45 MPG by the year 2000, a goal they say is both technologically and economically realistic. Marc Ledbetter of the American Council for an Energy-Efficient Economy estimates that such a standard would save 1.1 million barrels of oil a day and cut carbon emissions by 45 million tons a year. Automakers contend that a 45-MPG standard is out of the question, both because of technology limitations and a fierce consumer demand for large and powerful cars. A compromise formula proposed by Ohio Senator Howard Metzenbaum would raise the federal standard to 34 miles per gallon.

Higher mileage standards would be enforced by more severe gas-guzzler taxes. Under current law, companies that sell cars which fall below federal mileage standards must pay a tax of five dollars per tenth of a mile. A car that gets mileage ten miles under the standard, for example, is slapped with a tax of $500.

Environmentalists think that tax is far too low. Companies like Mercedes, Jaguar, and Rolls Royce have been flouting the federal mileage standards for years and passing on the gas-guzzler taxes to their wealthy customers. Legislation proposed by Senator Metzenbaum would put teeth in the gas-guzzler tax, raising it to $10 per tenth of a mile and giving the Department of Transportation authority to set it as high as $20 per tenth of a mile for persistent offenders.

Despite the environmental imperative to move towards more fuel-efficient cars, proposals for hiking federal mileage standards and gas guzzler taxes seldom make it out of committee on Capitol Hill. American car manufacturers have deployed their considerable lobbying muscle to block such moves, and President Bush's Secretary of Transportation, Samuel Skinner, is in favor, unbelievably, of rolling back the mileage standard to 26.5 miles per gallon.

Higher gasoline taxes, another measure that could cut driving and thus lower carbon dioxide emissions, may have a better chance of being enacted in the near future. But to reduce carbon dioxide emissions, new gas taxes would have to be substantial. According to one 1987 study, a thirty cent per gallon tax on gasoline would only cut miles travelled per vehicle by 8 percent.

To most Americans, the current nine cent federal gasoline tax and the additional fourteen cents in average state levies are already too high. By international standards, however, U.S. motorists are dramatically under-taxed. In France and Italy, gas costs over three dollars a gallon with taxes representing two-thirds of that cost. Even a 75 cent tax increase would keep American gasoline cheap by European standards.

Still, nearly two-thirds of the American public opposes higher levies on gasoline, and critics have long pointed out that gas taxes are regressive, hurting the poor most and unfairly penalizing those in the West and South who drive mom miles. Critics also argue that higher gasoline taxes, by themselves, are only half a policy. To make such taxes effective environmental policy, they would have to be coupled with other policies designed to promote more fuel-efficient cars and less reliance on driving. These could include fuel efficiency standards, development of non-polluting fuel alternatives such as electric or solar cars, and expansion of mass transit. Europe's much higher retail price of gasoline is not so burdensome because Europe has invested so heavily in rail systems and keeps rail prices low enough to ensure that rail is a realistic alternative for much intercity travel.

The European example suggests two important larger points about green taxes. The behavioral incentives they create should be part of a larger energy and environmental strategy. And the creative use of the revenues produced by the taxes is just as important as the tax in creating alternatives for consumers.

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While new taxes on gasoline could yield billions of dollars in revenue, some green taxes would be largely revenue-neutral. Taxes on gas guzzlers, for example, are more effective the less money they generate. Other environmental taxes function in the same manner, taxing products and practices as a way of reducing or eliminating their use. Italy's 1989 tax on plastic bags is an example of a green tax that is intended never to generate revenue. Because there are alternatives to plastic bags, it makes more sense for Italian consumers to stop using plastic bags than to pay the high tax on them. Deposits on car batteries and tires, proposed in several states, would have the same effect: If the deposits are high enough, most people will turn those items in at proper disposal sites.

In cases where green taxes are not revenue-neutral, it is important that receipts be spent on complementary policy purposes. With the federal government and many northeastern states facing serious budget deficits, green taxes are a tempting way to help raise money. What worries environmentalists is that plain revenue-raising devices will be disguised as environmental initiatives when in fact they do little for the environment. Such disingenuous measures could erode public support for green taxes before worthwhile ones are ever implemented.

To insure that green-tax money gets to the right places, some legislatures have targeted the revenue. Iowa's 1987 Groundwater Protection Act is perhaps the best example. Alarmed about growing contamination of water supplies by poisonous agricultural pesticides and fertilizers, the Iowa legislature moved to cut the use of such chemicals by taxing them. In writing the new law, legislators were guided by two principles. First, it was not fair to dictate new farming practices without providing support for alternatives; and second, money raised from the fees should logically go to protect groundwater. As a result, some of the revenue generated by the tax was given to the government's groundwater protection fund, with up to six million dollars specifically slated for research on environmentally safe farming practices at a newly established state center for sustainable agriculture. Following Iowa's lead, Minnesota and Oregon enacted similar groundwater protection measures in 1989.

At the federal level, a frequently discussed measure that would raise money for environmental purposes is a tax on packaging. The United States produces roughly 160 million tons of solid waste per year, or about twice as much, per capita, as Japan and some European countries. Many municipalities face a permanent garbage crisis, and with landfills closing around the nation, disposal costs are skyrocketing. But this swollen waste stream can be cut down. A recent study by the U.S. Office of Technology Assessment estimated prevention measures could reduce solid waste in this country by up to 50 percent over a five-year period.

A federal packaging tax would reduce the flow of discarded material by encouraging industry to research and standardize packaging that is lighter, less bulky and preferably made from recycled material. (See the accompanying article, "Changing the Waste Makers.") Revenue from the tax could be used to fund state and local recycling efforts. Currently, many states and municipalities are planning major new waste disposal projects, and as the Environmental Defense Fund has pointed out, federal aid for recycling could help leverage billions of dollars in private investment funds for new recycling plants. This infusion of funds would represent a big step forward for recycling efforts, where spending has been minor in comparison with the vast sums sunk into landfills and incineration. One study found that eighteen states in the Northeast planned to spend about $450 million on recycling efforts compared to $7-8 billion on incineration in the next five years. Federal recycling aid could help alter this unfortunate emphasis and serve as a model of how green taxes imposed by Washington can be used to bolster state and local environmental efforts.

Tax differentiation offers government another instrument for protecting the environment. By revoking tax subsidies for environmental offenders and granting them to those engaged in environmentally friendly enterprises, federal and state governments can achieve environmental goals in a revenue-neutral fashion. Recycling, again, is one area where there is potential for swift progress. Waste Management, Inc., a leading U.S. waste disposal firm, has complained that the federal tax code lacks credits or deductions that promote investment in recycling and waste reduction. Other private waste handlers have voiced the same complaint, and calls for recycling aid have been echoed in the public sector by organizations like the National League of Cities, which recommended last year that tax assistance be made available to identify and develop markets for recycled materials. Evidence that such help can make a difference is most apparent in Oregon where investment tax credits for recycling efforts have been available since the mid-1980s. By providing millions of dollars in tax subsidies to recyclers, Oregon has substantially cut the quantity of waste headed for landfills and incinerators.

The development of environmentally beneficial tax subsidies should be accompanied by the elimination of those that do harm, particularly in the area of energy and natural resources. Environmentalists have argued, for example, that tax subsidies to the timber and paper industry should be eliminated because they favor the production of virgin materials, placing recycled products at a disadvantage in the market. They have also attacked tax subsidies to the coal and oil industries and argue instead for a flat "carbon tax" on fossil-fuel products. Such a tax would be levied on each barrel of oil or ton of coal extracted from the earth, with the aim of discouraging the use of fossil fuels and thus reducing the carbon dioxide emissions that cause global warming. As with other green taxes, the revenues from a "carbon tax" could be earmarked for research and development of renewable energy sources.

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Despite the growing interest in green taxes, opposition to such taxes is intense, and during the 1990s showdowns between industry and legislators over green taxes are likely to become common as new assaults are mounted on environmentally harmful products and practices. For consumers, like industry, new green taxes will mean sacrifices. Dirty car batteries and tires may have to be hauled to deposit stations rather than thrown in the trash; supermarkets may no longer provide free plastic bags; and large, powerful cars could become a luxury of the past for most buyers.

Yet if public opinion polls are to be believed, a majority of Americans are now ready to make sacrifices for a cleaner environment. They are willing to spend more money on products they think will not hurt the environment and pay higher income taxes to finance new environmental initiatives. The common wisdom may suggest that advocating new taxes spells political death, but green taxes at least could prove, well, popular.

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