President-elect Donald Trump has promised massive tax reform during his administration, and maybe, just maybe, that could present an opportunity for the adoption of a carbon tax. The theory, termed “The Great Swap” in a report released Wednesday by public policy professor Joseph Aldy from the Harvard University Kennedy School of Government, is that the lost revenue from Trump administration tax cuts will have to be made up elsewhere, and a tax on carbon presents a significant opportunity to bring in such revenue.
“Recognizing that there’s a difference between what happens when one campaigns and when one has to then govern …when you move to governing, you start to learn that a lot of things are interrelated and have implications beyond just that narrow policy context,” Aldy said Wednesday in a presentation in Washington, D.C., hosted by the Progressive Policy Institute. “I think there is value in having this conversation about where we think there might be positive opportunities.”
In his report, Aldy said “substantial tax reform that lowers tax rates can only satisfy this political constraint if it also secures meaningful revenues raisers. A carbon tax generating $100 billion to $200 billion annually in revenues could enable larger rate cuts, which would likely serve as the most important marker of policy success to key stakeholders in the Republican Party.”
The idea received mixed reviews during a panel discussion following Aldy’s presentation. Todd Wooten, senior counsel for energy and tax on the Senate Finance Committee, was willing to accept the theory in at the very least an abstract sense. “Right now the president-elect and the Republican Congress have indicated they want to do big tax reform. What we know from efforts that my bosses [have taken] that that is going to be very difficult. It is just very, very hard to find the money without a new source of revenue,” he said.
However, should the push for big tax reform turn into a push for smaller tax reform, Wooten suggested, implementing a carbon tax to make up for lost revenue might be taken off the table entirely, if it was there at all to begin with. “If we start coming down on tax reform, if we start saying maybe we can’t cut the corporate rate 10 points because that would cost a trillion dollars, then all of a sudden I think it makes it less likely that we can do a carbon tax because all of a sudden you don’t need that massive infusion of money,” he said.
Jerry Taylor, president of the Niskanen Center, had a far less optimistic take on the “Great Swap.” He said the whole plan falls apart once the reality that Republicans are not concerned about replacing revenue lost to tax cuts sets in. “These people believe that tax cuts are almost by definition self-financing, and that one does not need to find offsetting revenue because of the magic leprechauns that follow from every tax cut bring in more revenue than is lost through the rate reduction,” he said. “The bottom line is that there has been no signal whatsoever that Republicans are interested in finding revenue offsets to pay for the massive tax cuts that Donald Trump has put on the table. Until we see that, I don’t think we should presuppose that Republicans are interested in finding revenue offsets.”
Trump pledged throughout his campaign to roll back the Obama administration’s climate change efforts, including nixing numerous regulations aimed at cutting greenhouse gas pollutions and pulling the U.S. out of the Paris Agreement on climate change. The panelists warned, as many environmentalists, scientists, and diplomats have since Trump’s election, that undoing these climate actions could be bad news. Doing so would turn young voters off of the Republican Party, as polls have suggested concern about climate change is much higher among millennials than previous generations, panel members said.
In a recent interview with The New York Times, Trump hinted he might be reconsidering his hard stance on climate change, which he has referred to in the past as a hoax perpetrated by the Chinese. Taylor however, was not convinced that the incoming president has seen the light. “Yeah, he told The New York Times he was open-minded. … I don’t know why we would pay more attention to that than the screaming chimpanzee we heard on the campaign trail … where he was very explicit over, and over, and over again.”
In a separate paper released Wednesday, Resources for the Future suggested that some of Trump’s campaign pledges, such as a vow to revitalize the coal industry, will be very hard if not impossible to achieve. “Economic realities expressed through market prices—particularly low oil and natural gas prices—and the low labor productivity of eastern coal, as well as old coal boilers, will frustrate Trump administration efforts to boost fossil fuel production,” the paper says.
In terms of rolling back climate action, while Trump has options at the federal level, there is little he can do to fight environmental and economic regulations put in place by states, according to the RFF paper.
