The Washington Examiner recently ran an op-ed which argues that almost all the “revenue-neutral” carbon tax proposals are actually “budget-neutral” and would inevitably increase government revenue and, thus, the size of the government. However, the amount of revenue the government collects does not provide the whole picture of the size of the government. This metric should not be used to dismiss a carbon tax. 

In his piece, Ryan Ellis, the president of the Center for a Free Economy, describes two budget concepts: revenue neutrality and budget neutrality. A policy that is revenue-neutral keeps the amount of government revenue unchanged. A proposal may raise a tax, but it will reduce another tax, thereby keeping revenue collections constant. A policy that is budget-neutral, or deficit-neutral, keeps the government deficit (revenue minus expenses) unchanged. If a policy collects more revenue, it will hold the deficit unchanged by spending all the additional revenue or reducing taxes. As Ellis mentions, a revenue-neutral policy is budget-neutral, but a budget-neutral policy is not necessarily revenue-neutral.

There are indeed no existing carbon tax proposals that are truly revenue-neutral. Carbon tax proposals introduced in Congress typically seek to use the collected revenue in a combination of different ways, including dividends, tax cuts, investment in clean technologies, transition assistance, etc.  These policies are more accurately described as budget neutral.

That said, focusing only on the amount of revenue the federal government collects creates a distorted view of the government’s size and scope. 

Lawmakers often provide narrow or broad benefits through the tax code that are equivalent to spending. For example, according to the Joint Committee on Taxation, the renewable electricity production tax credit (PTC) is associated with $19.3 billion of foregone revenue between 2019 and 2023, before the 2019 PTC extension. This foregone revenue, or tax expenditure, reduces the amount of revenue the federal government collects as a percent of GDP. However, this tax cut is not much different from the government collecting the full amount of tax from green energy companies and turning around and cutting a check to the company for the same investments.

The size of the federal government is also influenced by policies other than taxes and spending. The federal government regulates a broad range of economic activity directly. Environmental and climate policy is regulated by the EPA. This directly contributes to the size of the federal government. A policy, such as a carbon tax, that replaces a government regulation with an equivalent tax would boost federal revenue. Still, it would not really change the government’s size since the government is doing nearly the same thing as it was doing before. 

If one agrees that we need to solve climate change with a national policy without significantly increasing the government’s size, then a carbon tax is a great idea. The alternatives to a carbon tax are a patchwork of regulations, performance mandates, and subsidies that currently define climate action in the United States. Extensive regulations would require the government to investigate carbon emissions within specific sectors and set standards or mandates sector by sector, which may result in a much larger government than one that implements a federal tax. And rebating part of the carbon tax as a dividend is a much more hands-off approach than providing highly targeted subsidies to favor industries and businesses. 

There is almost no agreement on the proper size and scope of government. And different people might come to different conclusions depending on their values and preferences. But how much revenue the government collects is a poor metric for the size of government, and more federal revenue should not stop lawmakers from pursuing a carbon tax.

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