President Biden’s recently-released fiscal year 2024 budget plan proposes tax increases on corporations and wealthy individuals–something the Administration has proposed before but failed to pass through Congress. According to the White House, the new proposal would reduce the federal deficit by almost $3 trillion over the next decade. Yet there is nary a mention of a carbon tax in the proposed budget–a missed opportunity given its revenue-raising potentials that would help alleviate the federal deficit and move the Administration closer to its climate goals.
The White Houses’ budget proposes expanding funding for programs like defense and immigration and extending the tax cuts passed in the 2017 Tax Cuts and Jobs Act for households making less than $400,000 (the costs of extending the tax cuts, however, are missing from the budget plan). It also proposes raising taxes on wealthy individuals (from 37% to 39.6%) and large corporations (from 21% to 28%) and raising the tax rates on capital gains of high-income taxpayers and U.S. corporations’ foreign profits.
These measures could be helpful in reducing the deficit. Still, overlooking the role a carbon tax would play is a gross miscalculation. A carbon tax is a consumption tax levied on the carbon emissions associated with production and consumption activities in the economy. It is less distortionary than raising taxes on capital. It would also encourage consumers to switch to clean energy sources and technologies by pricing the negative effects of fossil fuel consumption.
Economists widely regard a carbon tax as the best policy to incentivize decarbonization. It has gained notable support from corporations and leading trade groups, including the Business Roundtable, American Petroleum Institute, and American Bankers Association.
The Congressional Budget Office (CBO) projects debt held by the public will increase relative to the size of the U.S. economy annually, equaling 118 percent of GDP by 2033. The U.S. Government Accountability Office concludes that “the federal government faces an unsustainable fiscal future” and calls for “an effective fiscal plan” to change the U.S. fiscal trajectory.
A carbon tax would raise substantial revenue that could alleviate this projected deficit. CBO estimates that a $25 per-metric-ton carbon tax rising at a 5 percent annual rate above inflation would reduce the deficit by $865 billion between 2023 and 2032. The Committee for a Responsible Federal Budget proposed a carbon tax in its 2022 blueprint for reducing the federal debt by $200 billion over a decade with a majority of the revenue used for household rebates, cutting other taxes, and new investments. The Treasury’s Office of Tax Analysis estimated that a $49-per-ton carbon tax rising to $70-per-ton in the tenth year would generate net revenue of $2.2 trillion over a decade, some of which could enable deficit reduction.
The revenue raised by a carbon tax can have multiple uses. It could be rebated to households to mitigate a carbon tax’s negative impact on consumers, particularly low-income households. It could be used for investment in clean technologies to help accelerate the transition to a net-zero economy, or to cut other more distortionary taxes such as corporate or individual income tax.
If the Biden administration is serious about lowering the U.S. federal deficit to a sustainable level, it needs to include carbon taxation in its plan. It’s a surefire way to incentivize quick emissions reduction and a revenue-raiser that will be critical in driving down the U.S. federal deficit.