Shifting Tax Burden to Polluters Could Cut Taxes on Wages and Profits by 15 Percent

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Saturday, May 10, 1997

SHIFTING TAX BURDEN TO POLLUTERS COULD CUT
TAXES ON WAGES AND PROFITS BY 15 PERCENT

Increasing taxes on pollution and resource use while lowering taxes on income and wages is a powerful new tool for protecting the environment, reports a new study from the Worldwatch Institute titled Getting the Signals Right: Tax Reform to Protect the Environment and the Economy. Such a tax shift could also create millions of jobs and boost living standards of the working poor.

Countries around the world are now experimenting with environmental taxes, says the report, which documents how five nations have made revenue-neutral "tax shifts," using the money from environmental taxes to cut the conventional taxes that penalize work and investment.

"Tax shifting is cheap insurance," says Senior Researcher David Malin Roodman, author of the report. "We can reduce the risk of global warming, for example, without raising taxes overall or hurting the economy."

"Today's tax codes are dangerously behind the times -- relics of an era when we could ignore our economic dependence on the environment," Roodman says. "Air pollution prematurely ends the lives of over 300,000 people worldwide each year and causes chronic coughing in 50 million children. But 90 percent of the world's $7.5 trillion yearly tax burden is levied on work and investment, while less than 5 percent comes from taxes on environmental harm."

More fully taxing pollution could raise more than $1 trillion a year worldwide, which could be used to cut taxes on wages and profits by up to 15 percent -- leaving the total tax burden unchanged. Some industries, such as coal mining, would lose, but others that do little environmental harm, from computer software to recycling, would gain.

"Today, environmental harm is often cheap or free to the people and companies who cause it," Roodman notes. "For example, in the United States, the unpaid costs to society of driving -- ranging from lung disease to noise pollution -- are estimated at $218 billion per year. Only if drivers begin to pay more of those costs can the problems themselves ultimately be solved."

It no longer makes economic sense to let people pollute the air we all breathe or destroy ancient forests tax-free, while taxing our work and investment in order to cope with the resulting environmental damage, the report argues.

"When governments turn the tables and tax pollution and resource depletion, the consumers who use polluting products and the businesses that produce them must pay the price, and in many cases will change their behavior.

With such taxes, governments can do what they do best -- set targets for reducing environmental damage -- and markets can do what they do best -- find the cheapest ways to hit those targets."

Thousands of environmental taxes are on the books worldwide, but only a small number are high enough to do much good. However, the number of effective taxes has increased in recent years, some with an added bonus: five European countries have linked environmental tax hikes to cuts in income and wage taxes.

Among the examples of environmental taxes cited in the Worldwatch study:

• In the Netherlands, taxes on industrial emissions of heavy metals have led to a reduction in the leakage of cadmium, copper, lead, mercury, and zinc into canals and lakes by 86-97 percent since 1976 -- and made the country a global leader in water pollution technologies.

• Australia, Denmark, and the United States used taxes on CFCs to help phase out these chemicals -- as required under the 1987 Montreal Protocol, the treaty to protect the ozone layer -- in less than a decade. The U.S. tax has raised $4.1 billion.

• In Sweden, air pollution taxes helped reduce emissions of nitrogen oxides -- which contribute to acid rain -- by 35 percent in just one year.

• Germany cut the production of toxic wastes by 15 percent in just three years by using taxes.

• Malaysia adjusted its motor fuels taxes to make leaded gasoline more expensive than unleaded, allowing unleaded fuel to grab more than 60 percent of the market.

"Tax cuts can sweeten the sometimes bitter medicine of environmental tax reform," Roodman notes. "In Europe, most environmental tax shifts have been accompanied by reductions in payroll taxes, thus reducing the cost of generating new jobs -- a high priority since unemployment in the European Union currently stands at 11 percent." Recently, the European Commission, the administrative arm of the European Union, suggested that an EU-wide tax on carbon emissions and energy use be dedicated to cutting payroll taxes, allowing an estimated 1.5 million new jobs to be created.

In the United States, where unemployment is only half the European level, economists estimate that a similar cut in payroll tax cuts would tend to push up the income of workers, including those at the lower end of the wage scale -- perhaps reducing the number of "working poor." Eleven percent of all U.S. families with children and at least one full-time worker -- more than three million families -- lived below the poverty line in 1995.

Some governments have taken another approach to harnessing the arket for environmental gain. Instead of taxing environmental harm, they auction or give away permits for pollution and resource depletion, then allow businesses to trade the permits among themselves. Singapore has used this approach to phase out CFCs. Among the other examples cited in the report:

• The U.S. government's system of permits for the emission of sulfur dioxide, which also contributes to acid rain, enacted in 1990, will reduce emissions to half the 1980 level by 2000, while saving utilities $2-3 billion per year compared to the cost of less-flexible regulations.

• New Zealand now regulates most of its fisheries with permit systems. Overfishing has been reduced and many stocks appear to be rebuilding, while the fishing industry remains profitable.

• Facing water shortages, Chile has used a permit system on water use to cap consumption in some farming areas.

• New Jersey has created tradable development rights in the Pinelands, a 445,000-hectare region of wildlife habitat, berry farms, and small towns that faces strong development pressures. These permits limit total growth but give developers some flexibility in where to build.

Unlike most regulations, which set prescriptive standards, environmental tax and permit systems put a price on pollution, providing an ongoing stimulus for improvement without restricting industries' and consumers' flexibility to respond. Recent trends suggest the scale of the new business opportunities:

• Sales of organic food in the United States grew from $180 million in 1980 to $2.3 billion in 1994, a 13-fold increase.

• Global windpower capacity has doubled in the last three years, and solar cell sales doubled over the last six years.

• The total market for "environmental" goods and services that monitor and control pollution, recycle, and conserve energy had risen to $408 billion by 1994, and is projected to reach $572 billion by 2001.

Environmental tax and permit systems are likely to accelerate the growth of these industries, and make the transition to an environmentally sound economy more gradual and predictable. A carbon tax, for example, could start low and then rise over 20 years, allowing cars and factories to live out their useful lives and then be replaced by less polluting models. Announcing such tax increases ahead of time would send a powerful signal about an economy's direction, and encourage businesses to plan ahead.

Tax and permit systems are promising medicine, but are neither cure-alls nor free of side effects. Drivers will not respond to a gasoline tax by driving less, for example, unless good zoning laws and mass transit systems provide them with alternative means of getting to shopping and work. And pensioners living on fixed incomes, who lack the funds to invest in energy conservation, could have their living standards diminished by higher oil or electricity prices.

Roodman recommends, therefore, that tax and permit systems not be applied puritanically. To protect low-income families, the coastal town of Setubal, Portugal, for example, has "terraced" its new water taxes. Households can buy 25 cubic meters a month tax-free, enough to meet most basic needs; but above that threshold, a water tax begins to kick in, rising progressively in three stages.

"Still, environmental tax reform faces many political obstacles. Businesses on the losing side of environmental tax shifts are often the best financed and organized, and have successfully opposed increases in energy taxes in the United States and other countries in recent years. But environmental tax shifting creates more winners than losers, since every cut in one person's taxes is a rise in someone else's, and we all gain from a healthier environment."

The task for environmental tax reformers is to build alliances to create a winning majority. They can find common ground with labor unions that favor wage tax cuts; with minimally polluting service businesses that would receive more from reductions in current taxes than they would pay in environmental taxes; and with vendors of environmentally protective goods and services.

Polling data from the United States and European Union show broad support for environmental tax shifting. On both sides of the Atlantic, 70 percent of those surveyed have favored the change once they understood it. The European Trade Union Confederation and the Union of Industrial and Employers' Confederation of Europe have also endorsed the idea.

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