By Donella Meadows

–April 9, 1998–

Right around income tax time all the political bombast about getting rid of the IRS begins to sound good.  Possible even.  A booklet called “Tax Shift,” which handily arrived on my desk just before April 15, tells how we could replace existing taxes and improve both the economy and the environment in the process.

As the title “Tax Shift” indicates, this is not a tract about having no government and no taxes.  It accepts that we have to tax SOMETHING and makes an impeccable economic argument for taxing not goods, such as income or capital. but bads, such as tobacco or alcohol or — this is the main point — resource use.

We discourage whatever we tax by making it more expensive.  Taxing labor makes people less eager to work and employers less eager to hire.  Taxing interest and dividends reduces the incentive to invest.  Making workers or investment more costly raises the price of everything that uses labor or capital, and the higher price dampens demand.  Every dollar of federal income tax causes a “deadweight loss” to the economy of 31 cents.  Similar losses come from payroll taxes, property taxes, sales taxes, and corporate income taxes.

If taxes must raise the cost of something and force people to do less of it, why not tax something we want people to do less of?  That’s the logic behind “sin taxes,” most notably levied on cigarettes.  But governments have already latched onto most taxable sins.  What they haven’t latched onto is resource use, which is a sin only when it goes beyond necessity to wastefulness and self-destruction — which taxes could help prevent.

Tax gas and oil and coal.  Tax water withdrawals from streams and groundwater.  Tax every kilowatt-hour generated by putting rivers through turbines, every ton of material taken from a mine, every tree cut down.  Charge every car that turns onto a jammed highway at rush hour; no charge when road space frees up.  Tax fertilizers and pesticides that pollute when they run off farmers’ fields.  Tax toxic waste emissions, the more toxic the higher the fee.  Tax garbage.  Tax sprawl development but not development that fills in empty spaces in city centers.  Tax fishing and raise the tax as the fish population starts to go down.

Can you hear the squeals already?  We are already taxed to death, the oil companies and irrigators will say, when in fact they are subsidized.  We would have to shut down, the loggers and miners will say, but that will not happen.  We will always need materials from nature.  Higher prices will simply reward people for doing what they should have been doing all along — using materials wisely because they are costly, instead of frittering them away because they are undervalued.

There would be three economic benefits from resource and pollution taxes.  One, they would lift the deadweight loss from other taxes they would replace.  Two, they would correct the biggest flaw in the market — the tendency to give nature zero value.  That tendency, a holdover from long-gone days when labor and capital were scarce and trees and fish and water were abundant, causes mispricing and bad decisions throughout the economy.  And three, with prices corrected, all kinds of technologies would be stimulated that would use materials efficiently, tap solar energy, recycle wastes, stop generating toxics, renew forests and fisheries.

Then there would be the environmental and health benefits.

“Tax Shift” assumes fairly low pollution and resource tax rates, assumes they would lead to 15 percent reductions in resource use, and calculates that for the Pacific Northwest alone, these taxes would bring in $29 billion, enough to displace 28 percent of all state and local taxes collected in the region.  A modest federal carbon tax ($100 per ton of carbon dioxide generated) would raise $5.8 billion in the Northwest, add eight cents to the price of a gallon of gas, achieve emission reductions more than twice what we pledged at the Kyoto global climate conference, and save the average working household $852 a year in payroll taxes.

Payroll taxes, the ones called FICA, the ones automatically extracted from our paychecks, are the federal taxes the authors of “Tax Shift” pick as first choice to shift away from.  On the state level they pick sales taxes.  Why?  Because those are the most unfair taxes.  They fall much more heavily on the poor and middle class than on the rich.  In many states the poorest fifth of all households pay three times as much of their income in sales tax as do the richest fifth.  Seventy percent of Americans pay more payroll tax than income tax.

A resource tax would be too complicated, I’ve heard people say, an argument that dims when I look at my tax forms in early April.  A complicated tax system we’ve got already.  On that basis I’d be as happy as anyone to throw out the income tax.  We could do that too, we could replace all other taxes, if we were willing to charge high enough “green” fees.  Whether to do that, how high to raise them, is best decided gradually, so the economy can adjust and resource-saving technologies can be adopted.

Shifting to resource taxes makes total sense on economic, environmental and equity grounds.  All that stands in their way are the 228 political action committees of the mining, timber, real estate, and agribusiness interests and the politicians beholden to them.

(“Tax Shift” by Alan Thein Durning and Yoram Bauman is published by Northwest Environment Watch, 1402 Third Avenue, Suite 1127, Seattle WA 98101-2118.  Telephone 206-447-1880.  Email new@northwestwatch.org.)

Copyright Sustainability Institute 1998

Update – The organization is now renamed Sightline Institute, http://www.sightline.org