Congressional leaders and the administration are working hard to develop a tax reform package that can achieve the difficult goals of significantly lowering the corporate tax rate while maintaining fiscal responsibility. A carbon tax would achieve these two objectives simultaneously. Here are a few reasons the administration should push for it:
- A 15 Percent Corporate Rate. The President has been adamant about his push for a 15 percent corporate tax rate. Tax analysts and budget experts from across the political spectrum have said it is nearly impossible to get to such a low rate; most policy makers expect the rate to be between 20 and 25 percent when it’s all said and done. But if a $30/ton or $40/ton carbon tax is on the table then all of a sudden a 15 percent corporate rate is absolutely achievable. This would give Trump a major victory on an item that no one thought he could accomplish.
- Some Conservatives Support It. Earlier this year, the Climate Leadership Council, led by heavy-hitting Republicans like James Baker and Henry Paulson, came out in favor of a carbon tax. This group joined other conservative groups, like the Niskanen Center, and scores of Republican economists who support such a tax. Some conservatives argue that a carbon tax is a market-based solution that puts a cost on an externality – in this case, carbon emissions – and appropriately allows other taxes – in this case, corporate taxes – to be reduced.
- Business Doesn’t Hate It. Most businesses recognize that they will face carbon constraints in the future. A tax regimen is much more efficient and easier to comply with than a regulatory regimen. Some companies, most notably Exxon Mobil, have already adopted a price on carbon for purposes of internal decision making; and others have already publicly endorsed a carbon tax. Furthermore, some companies are facing state requirements on carbon limits and many organizations are making voluntary reductions in their carbon footprint. A carbon tax would reward early actors and give them the benefit of a dramatically lower corporate tax rate.
- It Addresses Climate Change. Although the President has famously called climate change “a hoax,” it is clear that the White House is conflicted on how to move forward on the issue. The administration wavered for weeks about whether to pull out of the Paris Climate Agreement – and even recently there were reports that the decision to withdraw may be revisited. A carbon tax would allow the President to make a bold and significant step in addressing carbon emissions without embracing a highly regulatory approach and without the overlay of an international agreement. Enacting a carbon tax would allow President Trump to succeed where President Obama failed: passing legislation that addresses climate change.
- Talk about a Deal Maker! Pairing a carbon tax with a corporate tax rate reduction would be an “outside the box” proposal that might actually work. By attracting support from the left and the right, the President could emerge as the expert political deal maker that he’s always wanted to be.
Despite all the reasons to support a carbon tax in return for lower corporate tax rates, the likelihood of this compromise coming together is almost zero. Here’s why:
- The War on Coal. Ending the “war on coal” was a centerpiece of the Trump campaign and has been a theme of his administration since coming into office. Embracing a carbon tax would be a dramatic about-face. While President Trump’s views on many issues have evolved over time, this would be such a fundamental shift away from a core principle, and an important part of his political base, that it seems unlikely he would change his posture in this area.
- Republican Orthodoxy. Republicans have adamantly opposed a carbon tax for years. While President Trump is clearly not a traditional Republican, this proposal would be difficult for the GOP leadership to sell on Capitol Hill and it would create a major fissure between the White House and Congressional members of his own party. This is the largest hurdle that the proposal would face and is likely fatal to efforts to advance it.
Using a carbon tax to pay for sharp reduction in the corporate tax rate would fundamentally change the parameters of the debate on tax reform. And it wouldn’t be the first time this administration did something unexpected. Despite its potential upsides, it’s unlikely that policy makers will go this route as they work toward a proposal in the coming weeks.