Democratic lawmakers are seeking to assemble a $3.5 trillion reconciliation bill by mid-September. The package would include increased spending on social, healthcare, and climate change measures. The Senate Finance Committee put together a list of tax-hike proposals last week as pay-for options to fund the significant amount of proposed new spending. 

The list of proposals includes: raising corporate income tax rate and top individual income tax rate, levying an excise tax on stock buybacks, strengthening IRS enforcement in tax collection, and enacting a tax on carbon emissions. 

Policymakers should prioritize a border-adjusted carbon tax as they consider different pay-for options. It is a good pay-for policy as it raises substantial revenue, cuts domestic carbon emissions, and incentivizes decarbonization in global supply chains.  

An economy-wide carbon tax would raise a significant amount of revenue. The Treasury modeled a $49-per-metric-ton carbon tax that would rise at a two percent real rate to $70 per metric ton over a decade. Such a carbon tax would raise approximately $2.2 trillion in net revenue over ten years. In a recent op-ed, Senator Joe Manchin (D-W.Va.) wrote that he is concerned about America’s national debt levels and rising inflation, and called for “a strategic pause” on the reconciliation legislative bill. If not adding to the current national debt is a priority, Democratic lawmakers should view a carbon tax as an important source of revenue to fund the Democratic spending priorities in the reconciliation package. 

A carbon tax incentivizes decarbonization efficiently and effectively. It prices the negative externality imposed on society from the consumption of carbon-intensive goods. Levying a carbon tax is also a great alternative to command-and-control climate regulations. It is more economically efficient and less vulnerable to administrative and legal challenges than regulations. 

A border-adjusted carbon tax would level the playing field between U.S. and foreign producers, and encourage them to decarbonize their production processes. Border adjustment is a common mechanism used in different types of taxes, such as a value-added tax. Coupled with a domestic tax, a border adjustment taxes all domestic consumption by levying an import tax on imported goods and providing an export rebate for exported goods. A border-adjusted carbon tax would ensure importers are subject to the same tax burden as domestic producers, and U..S exporters are exempted from the carbon tax. It is an effective way to preserve U.S. producers’ competitiveness if America were to enact a unilateral carbon tax. 

A border-adjusted carbon tax would raise a sizable amount of revenue to fund social and health spending. It would also put America on the right path to mitigating climate change. Lawmakers should not overlook it as a sound policy as they consider offset options for the reconciliation legislation.