Democratic Senators are considering including a carbon tax in the pending budget bill. There are several reasons why lawmakers should include a carbon tax in the reconciliation bill. As explained in my last blog post, a carbon tax raises sizable revenue, cuts emissions efficiently, and incentivizes global decarbonization. Corporations should also support a carbon tax in reconciliation as it would relieve the pressure of raising the corporate income tax and serve as a much better alternative to regulatory policies.
Senator Sheldon Whitehouse recently told the Washington Examiner that a carbon tax is “highly likely” to be included in the Build Back Better budget bill. Last month, it was reported that Senator Kyrsten Sinema opposed the Democratic proposal to raise corporate income tax rate and top individual income tax rate, which led to Democrats seeking other pay-for options including a carbon tax.
Using a carbon tax to help pay for the big spending package would reduce the need for Democrats to raise the corporate income tax. Corporate income tax reduces companies’ after-tax income and distorts the rate of return of their investment. All types of taxes are distortionary to some extent, but corporate income tax creates the most negative impact on economic growth. The higher a corporate income tax is, the more it discourages investment. A higher corporate income tax would reduce the number of investment projects worth pursuing for companies due to the projects’ lower after-tax rate of return. Corporations should support a carbon tax in reconciliation and see it as a worthy tradeoff to limit Democrats’ raising the corporate income tax.
Passing a carbon tax through reconciliation will weaken the case for enacting any future greenhouse gas regulations with the same emission reduction goals. A carbon tax is a much better policy than regulations in incentivizing corporations to cut their emissions. It allows companies much greater flexibility in their decarbonization strategy than regulations. Companies can find the most efficient way to cut their emissions under a carbon tax when they have different abatement costs and when technology changes over time. Additionally, a carbon tax provides companies with much greater policy certainty than regulations through putting a price on per unit of emissions throughout the economy. This is especially important for companies’ strategic planning including making decisions on future investment.
Decarbonization in the business sector is already happening. Corporations will inevitably need to continue navigating various climate policies and cut their emissions to stay competitive. It would seem a smart choice for corporations to support a carbon tax in reconciliation—a less distortionary revenue raiser and an excellent climate policy.