Pay for the Infrastructure Bill With a Carbon Tax

June 16, 2021
By Michael R. Strain

Even if negotiators in Washington reach an agreement on a package to improve the nation’s infrastructure, paying for it will prove a major obstacle. This week, a bipartisan group of 10 moderate senators has advanced a $1.2 trillion, eight-year spending proposal on roads, bridges, tunnels and other projects, and is trying to win over President Joe Biden, along with skeptics in Congress in both parties.

To cover some of the costs, the group proposes repurposing unused Covid-19 relief funds and tapping the owners of electric vehicles for revenue since they aren’t paying much in federal gas taxes. The senators are opposed to raising taxes on corporations — the centerpiece of the president’s plan to finance the spending.

Some of these proposals make sense. But another potential source of revenue — a carbon tax — was not even discussed, even though it should appeal to several Republican lawmakers as well as most Democrats.

Mitigating climate change is a goal of the White House and congressional Democrats for any infrastructure law. By making carbon emissions more expensive, taxing them would induce millions of small changes every day that would ripple through the economy and help the environment.

To lower their electric bills, more people would remember to turn off the lights when they left a room. Carpooling could prove more popular, since the price of gasoline would be higher. Hotels would be encouraged to raise the default room temperature closer to 70 degrees. More people would wear sweaters in the winter rather than crank up the heat in their homes and offices.

The Climate Leadership Council, a bipartisan group that advocates for a carbon tax, estimates that a $40 per ton carbon tax that grew annually by 5% above the rate of inflation would cut U.S. emissions to half of 2005 levels by 2035, if implemented this year. According to the council, this would exceed U.S. targets under the Paris climate agreement. The plan would generate roughly $200 billion of tax revenue this year and $250 billion in five years — more than enough to pay for the senators’ proposal.

Another goal for an infrastructure law is to improve longer-term productivity. A carbon tax would help by giving companies incentives to develop and invest in low- and non-carbon energy sources. By making emissions more expensive, the tax would also promote innovative ways to use carbon more efficiently.

This strategy is far more effective and less costly than imposing regulations and doling out government subsidies. Innovators do better than regulators in figuring out ways to do business with less harm to the environment because private-sector solutions will be market tested.

Biden would prefer to find the revenue for infrastructure by raising taxes on corporations. But higher corporate taxes would reduce the after-tax return on business investment. Biden should want his revenue-raising policies to advance his laudable goals of increasing investment and the economy’s longer-term productive capacity, not work against them.

As for the senators’ idea to repurpose unused Covid-19 relief funds to pay for infrastructure, this is smart policy because federal grants to state and local governments were excessively large. Increasing productivity is a better use of surplus funds than what many states might hope to do with them. This would also remove some fiscal stimulus from the economy, reducing concerns about overheating and inflation.

But the existence of this pot of money is no reason to take the carbon tax off the table.

Taxing carbon emissions is an uphill political climb, but it’s achievable. Opposition from Republicans and the business community has softened in recent years. Progressive Democrats are opposed to market-based climate solutions, worried that they will be inadequate and inequitable. Biden should stand up to them. And just because Democratic Senator Joe Manchin of West Virginia, a member of the bipartisan group of senators, is adamantly opposed to the tax should not squelch its consideration.

In addition, the White House might object to a carbon tax because the president has pledged not to raise taxes on households earning less than $400,000 per year. But Biden’s proposed increase on corporate taxes would not spare the middle class: Workers would bear some of the burden of that policy in the form of lower wages.

Other options can be considered to pay for infrastructure spending, as well. User fees, like gas taxes, are a fair and efficient way to finance spending on roads, bridges, tunnels and ports. Because they are taxes on consumption, they do not reduce investment. And because some parts of any infrastructure deal will increase the ability of business to produce goods and services, financing part of a package with higher deficits is reasonable, as well.

The carbon tax, though, has unique advantages. Republicans should favor it because it bypasses regulation, encourages innovation and offers an alternative to a higher corporate tax. For Democrats, it would be a needed source of revenue that also helps the environment. It’s the obvious way forward.