Project Report:
Modeling the Impact of Carbon Tax Revenue Recycling
Purpose
- Explores and develops market-based solutions.

Summary

A carbon price, or tax, is an essential part of a market-based approach to reducing greenhouse gas emissions. By pursuing original research on novel implementations of carbon pricing revenue swaps and reporting the results, our work will address the following goals of the Walker Foundation: "explore and develop market-based solutions" and "disseminate information on the results and findings."

Description

The Niskanen Center will study how tax reform coinciding with the levying of a carbon tax price can meet new fiscal policy objectives that have trans-partisan support. Examples include expansion of the child tax credit and the earned income tax credit. Similar tax reforms have successfully been used to compensate for the regressivity of motor fuel excise taxes and could be implemented again in the coming years alongside a carbon tax. The study will assess both how carbon tax revenue could be used to expand these targeted benefits and how those targeted benefits would modify the distributional and economic impact of the carbon tax, in a way that previous studies have assessed the impacts of policies like carbon dividends or reductions in payroll tax rates.

The findings of this study will be useful by allowing policymakers to understand the connections between recent tax policy priorities and carbon taxation. We have identified a research partner who could help us develop a rigorous study of these questions with best-in-class tax and fiscal policy models. The Niskanen Center will publish, along with an external co-author, a report on the results of this study. In addition to publishing results, the Niskanen Center will communicate these results to allied organizations, climate advocates, anti-poverty advocates, tax and fiscal policy experts, policymakers, and the public. The goal of this work is to publish results before fall 2023.

The Niskanen Center will continue our search for a qualified external research partner that has in-depth knowledge of tax modeling and fiscal policies to collaborate on this project. We plan to complete the study by June 2023 and plan for a public release by Fall 2023 to ensure the release does not fall during the summer doldrums in D.C.

Purpose

With support of the Walker Foundation, the Niskanen Center will commission a new study, to be done with external collaborators, to study how tax reform coinciding with the levying of a carbon tax price can meet new fiscal policy objectives that have trans-partisan support. Examples include expansion of the child tax credit and the earned income tax credit. Similar tax reforms have successfully been used to compensate for the regressivity of motor fuel excise taxes and could be implemented again in the coming years alongside a carbon tax. The study will assess both how carbon tax revenue could be used to expand these targeted benefits and how those targeted benefits would modify the distributional and economic impact of the carbon tax, in a way that previous studies have assessed the impacts of policies like carbon dividends or reductions in payroll tax rates.

Scope

The findings of this study will be useful by allowing policymakers to understand the connections between recent tax policy priorities and carbon taxation. We have identified a research partner who could help us develop a rigorous study of these questions with best-in-class tax and fiscal policy models. The Niskanen Center will publish, along with an external co-author, a report on the results of this study. In addition to publishing results, the Niskanen Center will communicate these results to allied organizations, climate advocates, anti-poverty advocates, tax and fiscal policy experts, policymakers, and the public. The goal of this work is to publish results before Fall 2023.

Update 7-24-2023
Opponents of a carbon tax criticize its regressive impact on low-income households. There has been substantial analysis on some revenue recycling options to mitigate the regressive impact, including using carbon tax revenue to distribute dividends to households, or cut other taxes such as the corporate income tax. However, very little analysis is available on using the revenue to fund expanded family benefits.

This paper analyzes funding expanded family benefits with a carbon tax and examines this revenue recycling option’s impact on fiscal balance, distribution, poverty reduction, and work incentives.

We find that similar to the “carbon tax and dividends” approach, funding expanded family benefits with a carbon tax would be highly progressive and more than offset the regressive impact on low-income households. However, an expansion of family benefits has some important downsides compared to the dividends approach. One major disadvantage is that expanding family benefits would reduce work incentives, whereas dividends would not impact work incentives.

Information Dissemination

A white paper on the project results was published in Tax Notes magazine as their cover story in Vol 181, No. 4 on October 23, 2013, and on the Niskanen Center’s website on October 24, 2023. The Niskanen Center promoted the paper through various channels including conducting outreach to Congressional offices to share with them the paper’s findings to gain more support for carbon taxation.

Project Link https://www.niskanencenter.org/a-carbon-tax-to-finance-child-tax-credit-expansion/

Amount Approved
$50,000.00 on 6/8/2021 (Check sent: 6/11/2021)



Impact of Carbon Tax Revenue Recycling
iStock Photo credit


Attachments
Impact of Carbon Tax Revenue Recycling
Tax Notes magazine cover story
A carbon tax to finance Child Tax Credit expansion (PDF)

Address
820 1st Street NE, Suite 675
Washington, DC 20002


Phone
(202) 899-1161


Posted 3/22/2021 12:26 PM
Updated   11/13/2023 2:49 PM

  • Nonprofit

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