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What Should Obama Do First? A Green Tax Swap

10 Nov 2008
Posted by Andrew Samwick

Continuing a series that began last week with health care reform, I suggest that another high priority for the Obama Administration is what is known as the Green Tax Swap -- an increase in the gas tax combined with a reduction in the payroll tax rate that fully offsets the revenue increase.  (By gas, I mean all fossil fuels used for any purpose, but others might restrict what is taxed only to gasoline.)  What is the rationale for this?

At a very basic level, you get less of what you tax and more of what you don't.  Looking at our long-term energy needs, every little bit of energy conservation helps.  Looking particularly at our short-term macroeconomic needs, we would like to increase the returns to work.  Both the payroll tax and the gas tax are thought to be regressive, so on balance, we are not doing much.  As I note in this article by Steve Hargreaves of CNN Money (and with due credit to Greg Mankiw, who often says the same thing), is there anyone who would seriously advocate the opposite? 

Is there any indication that an Obama administration would consider this?  In his tax plan, Senator Obama did present some ideas for offsetting the payroll tax for some lower income workers, so at least he is open to that part of this.  Raising the gas tax is more problematic, since he's been promising a middle class tax cut.  He certainly couldn't raise this tax, politically, until he has made good on that promise and the one to allow the top marginal tax rates to revert to their pre-2001 levels.  But once those constraints are removed, and given the recent drop in gas prices, he should start sending the right signals for "green energy" through his tax policy.


The first time I heard this, it was proposed by Al Gore. This might be a good sign that the Obama administration might take it seriously. Ideally, the tax would be on carbon, so it would sit a bit more heavily on a BTU of coal than a BTU of natural gas.

In the short term, maybe

I think Obama could get away with raising the gas tax and simultaneously lowering the payroll tax. He could plausibly call that a "tax cut on the middle class" if the payroll tax drop was slightly higher than what the average middle class family would spend in increased gas taxes, for example. Certainly lots of his supporters would love him for it.

But I'm not sure what this is meant to accomplish. If the payroll tax cut is meant to offset the increases in gas taxes, then one of two things happens. Either it does, and gas consumption stays about where it is now, i.e. nothing accomplished but some fancy accounting. OR - the gas tax increase works, and the government loses money on the deal because people economize more on gas, and so BigGuv rakes in less in gas taxes.

One of the things Obama is proposing is a big increase in infrastructure spending. A drop in revenue from the gas tax isn't going to help him there.

Gas consumption will fall

The lower payroll tax rate offsets the revenue gain from the higher gas tax, but for that same amount of revenue, there is more work and less gas consumption because the relative price of gas is up and the relative cost of work is down.

He could plausibly call that

He could plausibly call that a "tax cut on the middle class" if the payroll tax drop was slightly higher than what the average middle class family would spend in increased gas taxes.
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