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Is a Carbon Tax Good for the Economy?

New America Media, News Report, Ngoc Nguyen Posted: Mar 23, 2009

SAN FRANCISCO -- Last December, Gov. Schwarzenegger tasked a 14-member commission to come up with new sources of revenue for the state that could put an end to the feast or famine revenue cycles seen in Sacramento. The Commission on the 21st Century Economy met on the campus of the University of California, Berkeley last week to hear testimony on one revenue option: a carbon tax.

The idea behind a carbon tax is to tax the use of fossil fuels and use the money to invest in the development of clean energy.

The simplest way to tax carbon-based fuels is through a gas tax, said Fred Silva, senior fiscal policy advisor for California Forward, a bipartisan organization that focuses on governance reform. The state already has a gas tax, so all it would have to do is simply increase it, said Silva, who attended Tuesdays meeting.

According to California Forward, even as it is, the state has the highest combined gas taxes in the country. California levies an 18 cent/gallon motor fuel tax paid by distributors, and a sales and use tax paid by consumers. Consumers also pay a federal fuel tax of 18.4 cents.

A carbon tax could also take the form of an energy tax (a surcharge on electricity that appears on a utility bill), or a tax on the number of miles clocked by drivers (vehicle miles traveled, VMT, tax).

[A VMT tax] hasnt been a popular approach and hasnt gone very far in California, Silva acknowledged. No legislator has proposed it as an option. Its far more difficult to get a handle on it.

Testifying before commissioners last Tuesday on carbon and energy taxes, Severin Borenstein, director of the UC Berkeley Energy Institute, said the state emits 500 million metric tons of greenhouse gases a year. If carbon were priced at $20/ton equal to a gas tax of 18 cents per gallon, or an energy tax of one cent per kilowatt/hour of electricity a carbon tax could take in $10 billion in revenue for the state per year.

According to State Board of Equalization, Californias sales tax on gasoline generated $3.6 billion in revenue during 2007. On April 1, the state sales tax rate will increase by one percent, as a part of the budget compromise, and will be in effect until July 2011 or 2012, depending on what voters decide during a special statewide election in May.

The budget signed by Gov. Schwarzenegger last month relies on spending cuts, temporary tax increases, money from the federal stimulus, and borrowing to close a budget gap of $40 billion through the fiscal year ending in 2010. On May 19, California voters will be asked to approve of the temporary tax increases, spending cuts and the set-up of a rainy day fund, a key feature of the governors budget reform measure (Proposition 1A).

The states budget woes stem in part from higher spending and revenue shortfalls due to a slowing economy and an outdated tax system, according to an analysis by the California Budget Project.

A carbon tax is undoubtedly a potential pot of money for the state, but the revenue stream has its drawbacks.

Borenstein highlighted two key issues with a carbon tax: the disproportionate impact on low-income households and the impact on the economy.

At a recent news briefing on the state budget crisis for ethnic media in San Francisco, organized by New America Media, journalists voiced concerns about the impact of increased taxes on low-income households and small businesses. Speaking at the event, James Mayer, executive director of California Forward, said the Commission was discussing three options to boost state coffers: 1) expansion of the sales tax to more services, 2) a carbon tax, and 3) a tax on commercial properties.

Mayer said the impact of a carbon tax on low-income households could be offset by reinvesting some of the money into public transit. California Forward is hosting several regional meetings to inform the public about changes to the states tax system.

Commissioner George Halvorson, chairman and CEO of Kaiser Foundation Health Plan and Kaiser Foundation Hospitals, suggested using a portion of the revenue from a carbon tax to offer rebates to low-income households or a tax credit on the purchase of energy efficient appliances or a fuel efficient car.

Several commissioners expressed concern that a carbon tax would undercut the states competitiveness and cause businesses to go elsewhere.

Borenstein said the economic impact of a carbon tax would be small, while the value of demonstrating this leadership is high. In addition, he said a carbon tax is a corrective tax that seeks to correct an inefficiency in the market; in this case, under-pricing the true cost of carbon-based fuels. Correcting these inefficiencies, he said, helps the economy to perform better.

Pollution is under-priced at zero, so its over-consumed, said Borenstein, who noted other corrective taxes such as on congestion in the form of road tolls and parking meters and unsafe driving through traffic tickets.

Silva of California Forward said a gas tax is a revenue stream that will diminish over time. Citing the example of the states cigarette tax, Silva said, revenues from the tax decrease by 10 percent each year, as higher prices cause some smokers to quit.

Sticker shock at the pump is already causing Californians to use less gas. According to the latest figures from the Board of Equalization, state residents used 35 million gallons less gas, a decline of 2.8 percent, in November 2008 as compared to the same time the year before.

The revenue stream from a gas tax will eventually drop off, Silva said, The underlying objective is not to raise money, its to change behavior.

Related Articles:

Californias Climate Solutions Must Protect All Californians

Schwarzenegger Maintains Fight Against Climate Change

Oil 2009 -- Be Careful What You Wish For



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