“[Brown’s] ability to make a complicated subject accessible to the general reader is remarkable...” –Katherine Salant, Washington Post
Chapter 11. Plan B: Rising to the Challenge: Shifting Taxes
The need for tax shifting—lowering income taxes while raising taxes on environmentally destructive activities—in order to get the market to tell the truth has been widely endorsed by economists. The basic idea is to establish a tax that reflects the indirect costs to society of an economic activity. For example, a tax on coal would incorporate the increased health care costs associated with breathing polluted air, the costs of damage from acid rain, and the costs of climate disruption.30
With this concept in hand, it is a short step to tax shifting—that is, reducing taxes on income and offsetting this with taxes on environmentally destructive activities. Nine countries in Western Europe have already begun the process of tax shifting, known as environmental tax reform. The amount of revenue shifted thus far is small, just a few percent. But enough experience has been gained to know that it works.31
Among the activities taxed in Europe are carbon emissions, emissions of heavy metals, and the generation of garbage (so-called landfill taxes). The Nordic countries, led by Sweden, pioneered tax shifting at the beginning of the 1990s. By 1999 a second wave of tax shifting was under way, this one including the larger economies of Germany, France, Italy, and the United Kingdom. Tax shifting does not change the level of taxes, only their composition. One of the better known changes was a four-year plan adopted in Germany in 1999 to shift taxes from labor to energy. By 2001, this had lowered fuel use by 5 percent. A tax on carbon emissions adopted in Finland in 1990 lowered emissions there 7 percent by 1998.32
Environmental tax reform is spreading, with the reform process now under way in Denmark, Finland, France, Germany, Italy, the Netherlands, Norway, Sweden, and the United Kingdom. There are isolated cases elsewhere. The United States, for example, imposed a stiff tax on chlorofluorocarbons to phase them out in accordance with the Montreal Protocol of 1987. At the local level, the city of Victoria, British Columbia, adopted a trash tax of $1.20 per bag of garbage, reducing its daily trash flow 18 percent within one year.33
One of the newer taxes gaining in popularity is the so-called congestion tax. City governments are turning to a tax on vehicles entering the city, or at least the inner part of the city where traffic congestion is most serious. In London, where the average speed of an automobile was 9 miles per hour—about the same as a horse-drawn carriage—a congestion tax was adopted in early 2003. The $8 charge on all motorists driving into the center city between 7 a.m. and 6:30 p.m. immediately reduced the number of vehicles by 24 percent, permitting traffic to flow more freely while cutting pollution and noise.34
Singapore was the first city to adopt such a tax some two decades ago. Although it was quite successful, only quite recently have other cities, such as Oslo and Melbourne, done so. London is by far the largest city to join in. Other cities that are becoming unlivable because of congestion, pollution, and noise may also turn to such taxes.35
For some products where the external costs are large and obvious, pressure is mounting to impose taxes. By far the most dramatic example of this was the agreement negotiated between the tobacco industry and state governments in the United States. After numerous state governments had launched litigation to force tobacco companies to reimburse them for the Medicare costs associated with treating smoking-related illnesses, the industry decided to negotiate a package reimbursement, agreeing in November 1998 to reimburse the 50 state governments to the tune of $251 billion—nearly $1,000 for every person in the United States. This landmark agreement was, in effect, a retroactive tax on cigarettes smoked in the past, one designed to incorporate some of the indirect costs. In order to pay this enormous bill, cigarette companies dramatically raised the price of their cigarettes, further discouraging smoking.36
The CDC study that calculated the social costs of smoking cigarettes in the United States at $7.18 per pack not only justifies raising taxes on cigarettes, it also provides an empirical framework within which to do so. In 2002, a year in which almost every state government in the United States faced a fiscal deficit because of deteriorating economic conditions, 21 states raised cigarette taxes. Perhaps the most dramatic increase came in New York City, where smokers faced an increase of 39¢ in the state tax and $1.42 in the city tax—a total increase of $1.81 per pack. This brought the price of a pack of cigarettes in New York City to roughly $7.50. Since a 10-percent price increase typically reduces smoking by 4 percent, the health benefits of this tax increase should be substantial.37
Environmental tax shifting usually brings a double dividend. In reducing taxes on income—in effect, taxes on labor—labor becomes less costly, creating additional jobs while protecting the environment. This was the principal motivation in the German four-year shift of taxes from income to energy. The shift from fossil fuels to more energy-efficient technologies and to renewable sources of energy reduces carbon emissions and represents a shift to more labor-intensive industries. By lowering the air pollution from smokestacks and tailpipes, it also reduces respiratory illnesses, such as asthma and emphysema, and health care costs—a triple dividend.38
When it comes to reflecting the value of nature's services, ecologists can calculate the values of services that a forest in a given location provides. Once these are determined, they can be incorporated into the price of trees as a stumpage tax of the sort that Bulgaria and Lithuania have adopted. Anyone wishing to cut a tree would have to pay a tax equal to the value of the services provided by that tree. The market would then be telling the truth. The effect of this would be to reduce tree cutting, since forest services may be worth several times as much as the timber, and to encourage wood and paper recycling.39
Tax shifting also helps countries gain the lead in producing new equipment, such as new energy technologies or those used for pollution control. For example, the Danish government's tax incentives for wind-generated electricity have made Denmark, a country of only 5 million people, the world's leading manufacturer of wind turbines.40
Some 2,500 economists, including eight Nobel Prize winners in economics, have endorsed the concept of tax shifts. Former Harvard economics professor N. Gregory Mankiw, who was nominated to be Chairman of the President's Council of Economic Advisors in early 2003, wrote in Fortune magazine: "Cutting income taxes while increasing gasoline taxes would lead to more rapid economic growth, less traffic congestion, safer roads, and reduced risk of global warming—all without jeopardizing long-term fiscal solvency. This may be the closest thing to a free lunch that economics has to offer." Mankiw could also have added that it would reduce the military expenditures associated with ensuring access to Middle Eastern oil.41
The Economist has recognized the advantage of environmental tax shifting and endorses it strongly: "On environmental grounds, never mind energy security, America taxes gasoline too lightly. Better than a one-off increase, a politically more feasible idea, and desirable in its own terms, would be a long-term plan to shift taxes from incomes to emissions of carbon." In Europe and the United States, polls indicate that at least 70 percent of voters support environmental tax reform once it is explained to them.42
30. Redefining Progress, The Economists' Statement on Climate Change (Oakland, CA: 1997).
31. David Malin Roodman, "Environmental Tax Shifts Multiplying," in Lester R. Brown et al., Vital Signs 2000 (New York: W.W. Norton & Company, 2000), pp. 138-39. 3
2. Ibid.; second wave and Finland from European Environment Agency (EEA), Environmental Taxes: Recent Developments in Tools for Integration, Environmental Issues Series No. 18 (Copenhagen, November 2000); Germany from German Federal Environment Ministry, "Environmental Effects of the Ecological Tax Reform," at www.bmu.de/english/topics/ oekosteuer/oekosteuer_environment.php, January 2002.
33. EEA, op. cit. note 32; U.S. chlorofluorocarbon tax from Elizabeth Cook, Ozone Protection in the United States: Elements of Success (Washington, DC: World Resources Institute, 1996); city of Victoria from David Malin Roodman, "Environmental Taxes Spread," in Lester R. Brown et al., Vital Signs 1996 (New York: W.W. Norton & Company, 1996), p. 114-15.
34. Tom Miles, "London Drivers to Pay UK's First Congestion Tax," Reuters, 28 February 2002; Randy Kennedy, "The Day The Traffic Disappeared," New York Times Magazine, 20 April 2003, pp. 42-45.
35. Miles, op. cit. note 34.
36. USDA, ERS, "Cigarette Price Increase Follows Tobacco Pact," Agricultural Outlook, January-February 1999.
37. CDC, op. cit. note 23; Campaign for Tobacco-Free Kids et al., Show Us the Money: A Report on the States' Allocation of the Tobacco Settlement Dollars (Washington, DC: January 2003); New York from Jodi Wilgoren, "Facing New Costs, Some Smokers Say 'Enough'," New York Times, 17 July 2002.
38. Peter P. Wrany and Kai Schlegelmilch, "The Ecological Tax Reform in Germany," prepared for the UN/OECD Workshop on Enhancing the Environment by Reforming Energy Prices, Pruhonice, Czech Republic, 14-16 June 2000.
39. Organisation for Economic Co-operation and Development, European Commission, and EEA, Environmentally Related Taxes Database, at www.oecd.org/env/tax-database, updated 13 May 2003.
40. "BTM Predicts Continued Growth for Wind Industry," op. cit. note 3, p. 8.
41. N. Gregory Mankiw, "Gas Tax Now!" Fortune, 24 May 1999, pp. 60-64.
42. "Addicted to Oil," The Economist, 15 December 2001; environmental tax support from David Malin Roodman, The Natural Wealth of Nations (New York: W.W. Norton & Company, 1998), p. 243.
Copyright © 2003 Earth Policy Institute