Washington Insider-- Friday

Carbon Tax Talk in an Anti-Tax Era

Here's a quick monitor of Washington farm and trade policy issues from DTN's well-placed observer.

Lawmaker Urges Trump to Combine EPA, DOE

The incoming Trump administration should combine the Environmental Protection Agency (EPA) and Department of Energy (DOE) into one agency, according to Rep. Kevin Cramer, R-N.D.

Cramer is a Trump energy adviser and said he proposed the idea in a policy paper and has not heard from Trump about whether he supports it or not. Cramer said such an action would generate administrative efficiencies.

"I'm looking for efficiencies," Cramer told Bloomberg BNA. "Besides good policy, I think it could be pretty efficient as well -- putting all of these scientists and researchers together. There are obvious connections because, really, our energy policy has largely become environmental policy."

However, others point out the effort would need congressional action and that it is not clear whether the Trump administration would back such a move. Cramer acknowledged that situation and said he would not pursue legislation if the administration did not back the plan.

Prior efforts to combine the two agencies has not gained traction in Congress to bring about the change.

Others note that the two agencies, while dealing in similar areas, have differing responsibilities. For example, they note that DOE is primarily oriented toward research and development and overseeing the nuclear waste cleanup and the nuclear arsenal. By contrast, EPA is primarily a regulatory agency with a focus on implementing and enforcing environmental statutes.

USTR: Russia Meets Letter, Not Spirit of Its WTO Membership

Tariff reductions implemented by Russia as part of their joining the WTO have been as they agreed but other non-tariff barriers undermined market access, the Office of the U.S. Trade Representative (USTR) said in an assessment of Russia's activities.

Tariffs were reduced on a host of products, from aircraft to chemicals and agricultural products and now has the final tariff rates agreed to in its 2012 WTO accession protocol for 90% of its tariff lines, USTR said, but added the country has deployed non-tariff barriers via customs regulations, subsidies and price controls.

"Reaping the benefits of Russia's WTO membership is becoming increasingly difficult as Russia rejects the trade liberalizing tenets of the WTO in favor of inward-looking, import-substitution economic policies," USTR said.

Washington Insider: Carbon Tax Talk in an Anti-Tax Era

As anti-tax advocates look forward to policies of a new administration that controls both the executive and congressional branches, discussions are focusing on ways the new tax structure could be defined. This week, Bloomberg is reporting that a revenue-neutral elimination of the corporate income tax could be achieved through a combination of lucrative feedback effects and a carbon emissions fee. It cites a report by the conservative R Street Institute (RSI) on the topic.

"Despite the political baggage associated with the climate debate, lawmakers could soon discover, as they attempt to slay the corporate tax code's many sacred cows, that a price on carbon just might be the easiest way to finance substantial tax reform," the Institute said.

Eliminating the corporate income tax would cost about $300 billion a year, RSI said, citing the Congressional Budget Office's (CBO) 2016 projections. However, "feedback effects" such as higher tax revenues from wages for workers; higher payments on capital gains and dividend income; and proceeds from repatriated earnings of US controlled foreign corporations would return at least $167.2 billion to the government

A $25-per-ton carbon price, rising at about 5% above inflation, could fill the rest of the gap, the group said, estimating a revenue gain of $166 billion.

Donald Marron, an Urban Institute fellow and director of economic policy initiatives who has studied this issue, said the R Street Institute's revenue estimate "seems a bit too generous." He pointed to a recently published CBO estimate that projects a $25-per-ton carbon tax that increases each year by 2% more than inflation would raise $978 billion over the next decade would fall well below the institute's revenue estimate.

"Theirs increases at 5% above inflation, rather than 2%, but that alone can't explain the difference," he told Bloomberg.

Marron said using a carbon tax to raise revenue and lower the corporate tax rate isn't a bad idea, and argued that "The best way to run a tax system is to start by taxing the stuff you want less of, so a carbon fee, a carbon tax is a great way to raise some revenue and there are good arguments to be made that we ought to reduce corporate taxes," he thinks.

While the RSI's report suggests that a carbon fee could eliminate the corporate income tax entirely, most previously proposed scenarios wouldn't achieve that goal, he said.

In a report he helped write in 2013, Marron found that you could bring down the rate a "notable amount" but you likely couldn't get anywhere near zero.

He pointed out that the institute isn't only imposing a carbon fee, but is also assuming revenues from dividends and capital gains taxes would increase.

At the same time, Marron noted that while there are merits to a carbon-corporate tax swap, the potential impact on low-income taxpayers should be considered. Cutting the corporate tax rate would likely benefit wealthy investors most, whereas a carbon tax "would fall particularly heavy on low-income folks," he said.

"High-income people would still pay more because they use more energy-intensive stuff," but low-income taxpayers would feel more of the burden due to rising gasoline and home electricity prices, he said.

As a result, consideration of a carbon-corporate tax swap presents a challenge since it would make the tax system less progressive, he noted. Lump sum tax rebates could also be part of the solution, according to his 2013 report.

In its recent report, the RSI references such challenges and calls the idea as "politically adventurous," since liberal lawmakers would likely disagree with reducing the corporate tax rate to zero, while conservative lawmakers have a track record of opposing a carbon tax.

Criticism of carbon taxes also has come from a different source. In May, President-elect Donald Trump flatly said he would not support it. The names included in the list of proposed nominations for Cabinet positions include mostly carbon tax opponents.

Still, when the Congress and the administration get down to hard-scrabble horse trading, the questions of who benefits and who doesn't from each of the potential extremely complex tax change proposals will become increasingly important. How and when that process will proceed remains to be seen, but the recent political pressure for tax changes has been immense and seems likely to get underway soon. It certainly is a process producers should watch closely as it evolves, Washington Insider believes.

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