CHAMPAIGN, Ill. Although policymakers believe the regressiveness of pollution taxes can be offset by returning revenue to the low paid through a reduced labor tax, that approach may not work, and also could have the unintended consequence of shrinking some workers' overall real net wages, according to research by a University of Illinois energy policy expert.
Don Fullerton, a finance professor and former deputy assistant secretary of the U.S. Treasury Department, says that using revenue from pollution taxes to lessen its regressiveness on low-wage workers is not enough to offset higher commodity prices and shrunken real wages that would result from such a tax.
"Revenue from a carbon tax would certainly help, but it wouldn't be enough to protect low-wage households from any harm," said Fullerton, a researcher in the U. of I. Institute of Government and Public Affairs and the Center for Business and Public Policy in the College of Business. "A carbon tax is going to have costs, and while we might be able to play with the distributional burden of the costs, it's hard to protect low-income workers completely. There may just not be enough money to help them out."
Any sort of carbon tax, cap-and-trade or carbon pricing is likely to raise the price of commodities consumed by low-income people an undesirable effect that lawmakers are aware of, Fullerton said.
Although the cap-and-trade bill that passed the House is now dead, lawmakers wrote the bill with an eye toward helping low-income households purchase electricity.
"I think policymakers in general recognize that it's going to have regressive effects when the prices of electricity, gasoline and heating fuel go up, because these goods make up a big fraction of low-income budgets," said Fullerton, an expert on the economic impact of environmental regulations. "That's why these types of tax rebate proposals are floated, to make a pollution tax or a carbon tax more politi
|Contact: Phil Ciciora|
University of Illinois at Urbana-Champaign