'Polluter Pays' Reform Puts The Green in Tax Dollars

HERE'S food for thought while you're writing that check to the IRS: Why does your government tax you for making a living but let polluters dirty your air and water for free? If American politicians really wanted a tax code that made sense, they would push for levies on activities that hurt the economy and society - and that governments already spend tax dollars trying to control - and cut the taxes that discourage work and depress wages.

Ninety percent of the tax burden in the United States rests on work and investment, through levies on everything from retail sales to houses. But by taxing wealth, the government slows its creation. For example, taxes on corporate profit and capital gains discourage investment. And the lion's share of US tax revenue - over $1 trillion a year - comes from personal-income and payroll taxes, cutting into paychecks and discouraging new hiring. Thus the tax code significantly contributes to the problem of stagnant and falling wages.

The brief rise of Steve Forbes and his flat tax showed that voters do want to be rid of a complex tax system that only rich corporations and individuals can manipulate to their advantage. But the flat tax smelled fishy to voters; what it gained in simplicity it lost in fairness. It was just another way to sock it to regular citizens while cutting taxes for the rich.

The fundamental problem with the flat tax and its ilk is that they are simply different ways to tax what we should try not to tax: wages and profits. Tax reform must involve more than tinkering with the formula by which we write checks to the government every April 15. Instead of taxing people based on how much they contribute to the economy, the government should tax people based more on how much they subtract from it - as long as that does not mean simply shifting taxes from the rich to the rest of society. It seems the very definition of fairness, for instance, for polluters to pay the costs of the harm they do to our air, our water, and our health. Yet our tax code largely ignores the idea of "polluter pays."

To understand the perversity of the current tax system, consider farmers who spray fertilizers and pesticides on their crops to boost their yields - and their bottom lines - but leave it to society to foot the environmental bill. As their chemicals penetrate the soil, they threaten its long-term health. When the chemicals infiltrate water supplies, then income and employment fall in fishing and tourism industries, waterfront property values decline, and spending to protect drinking water climbs. In fact, the United States spends $2 billion each year trying to control agricultural pollution caused by farmers who do not have to pay these costs.

Taxing air and water pollution and the depletion of natural resources, such as groundwater and oil, would force environmental costs onto the farmers' and miners' general ledgers. That would push them to slow environmental destruction to levels that make more economic sense. As a bonus, environmental taxes would simplify government by doing double duty: They could replace other environmental-protection programs and other taxes.

Every dollar raised in pollution taxes can be cut from income and other taxes. A big new source of revenue could be a tax on the carbon dioxide emissions that most atmospheric scientists now believe are causing global warming. A 9-cents-a-pound carbon tax on coal, natural gas, and oil would increase the price of gasoline - now near a record low - by 55 cents a gallon. That seems like a lot, but it would only represent a return to what consumers paid in 1984, after adjusting for inflation. Yet it could raise nearly $240 billion, which could cover an 8 percent raise for most workers. Or, it could fund a hike in the personal income tax exemption from $2,500 per family member to $12,500 - enough to end income taxes for 55 percent of current filers. Now that's tax simplification.

This is not a free lunch. The government would still collect the same amount of money, just in ways that are fairer and would lead the economy in a healthier direction.

Shareholders of companies that produce things like virgin steel would indeed be affected by environmental taxes. Consumers would also pay more for energy and energy-intensive goods. But cleaner-operating companies, such as steel recyclers, would gain a competitive edge. And consumers would come out ahead as long as the tax cuts give back to them more than they lose through higher prices. Finally, everyone would benefit from a healthier environment.

Nevertheless, there can be a real human cost in making the economy environmentally sound, in terms of the workers and their families dislocated by declining industries such as coal mining. To make the transition as fair as possible, environmental tax reform should occur gradually, with some of the revenues dedicated to retraining programs and other transitional assistance. Some money should also be set aside for people who would get nothing from a tax cut but who might, for example, face higher heating bills.

Once pollution taxes reached their full rates their impact would likely be to cut pollution and resource depletion - thus shrinking tax revenues. When that time arrived other tax revenues would eventually need to climb again. Yet these changes would not be rapid by historical standards.

SPAIN, the United Kingdom, the Netherlands, Sweden, Norway, and Denmark have all made small environmental tax shifts since 1991, and neighboring governments are considering them. In Germany, more than a dozen major manufacturing and service companies, including Tupperware and the giant appliance maker AEG, have publicly endorsed a tax shift. They'd benefit if the tax base shifted from labor (which they spend a lot on) toward energy (which they spend little on). All but one of the major political parties endorse the idea.

With so much going for it, it is only a matter of time before environmental tax reform reaches the New World. Ironically, America's current standard-bearers for "tax reform," in their obsession with taxing the same things in different ways, seem much less like pioneers than determined leaders of a Flat Tax Society. Like members of the Flat Earth Society, they operate within exceedingly narrow intellectual horizons.

They're missing the boat on tax reform and economic progress.