Scientists have now deciphered the DNA of a particular species of roundworm. The genes, if laid out on newsprint, would fill 2,700 pages of the Seattle Times. It’s time to give similar scrutiny to the DNA of our Earth-wrecking economy: the tax code.
The Internal Revenue Code runs to 7.5 million words and occupies, with the regulations that interpret it, one and half feet of shelf space. Half a million people earn their living simply deciphering it for us commoners.
But complexity is not the worst fault of our public revenue system, nor is the federal tax the only flawed one. The biggest, and least discussed, problem in taxdom is this: we tax the wrong things.
WHEN YOU TAX SOMETHING, YOU GET LESS OF IT.
When you tax something, you get less of it. That’s the stuff of Economics 101. So what do we tax? At the federal level: personal income, corporate profit, and payrolls; at the state and local levels, retail sales, business, and real estate.
Mostly, then, we tax things we want more of, such as paychecks, enterprise, investment, and housing, not things we want less of, such as pollution, resource depletion, traffic jams, and sprawl. Naturally, we get less money and more messes.
Our tax system, at each level of government, hurts both the economy and the environment. But if we turn it on its head and tax “bads” instead of “goods”, we will reap double dividends, yielding both cleaner air and flusher bank accounts. In our new book Tax Shift, researcher Yoram Bauman and I, aided by the many volunteers at Northwest Environment Watch, explore how such a tax shift would work in Washington and neighboring states.
TAX SHIFT: GREEN TAXES
By shrinking the enterprise-deadening incentives of existing taxes, a tax shift would grow our state economy by at least an extra $2.5 billion a year and probably much more. It would also steer billions of daily decisions toward environmental sustainability. Along the way, it would relieve gridlock and save hundreds of lives each year by reducing the environmental contamination and traffic accidents that kill more than 2,500 Washingtonians each year.
Sound too good to be true? Well, don’t take it from me. Shifting taxes is an idea that comes from mainstream economists, with roots that go back to Adam Smith. Some 2,600 economists including eight Nobel Laureates recently endorsed tax shifting as part of a strategy to respond to global climate change. Environmental taxes put hidden environmental costs of production—childhood cancers caused by pollution, for example, and flood damage caused by clear cut watersheds—into the ledgers of businesses and the prices of consumer goods. They make prices tell the ecological truth. That’s why, as The Economist says, “green taxes are good taxes.”
Whether you think government is too big, too small, or just right, the logic of shifting taxes is compelling. It’s convinced six European nations to move billions of dollars of taxes off work and onto pollution since 1991. And it’s prompted legislatures in California, Minnesota, and Vermont to consider doing the same. So far, however, the idea lacks champions in our state.
The benefits of tax shifting are enormous. For starters, it will speed economic development. Because existing taxes discourage work and investment, the average tax dollar collected in Washington suppresses economic output by about 24 cents, according to the research of Harvard University economist Dale Jorgenson. (That’s compared to taxes that do not create perverse economic incentives, not compared to zero government.) Multiply $.24 by the $48 billion we Washingtonians pay in taxes each year, to all levels of government, and you’ll see what we lose from our current tax system.
Those losses are especially great for workers. The combination of income and payroll taxes puts a burden on paychecks that usually exceeds 30 percent. For every $1,000 in after-tax pay, you and your employer write checks to the government for $300 or more. These taxes suppress wages and tell the economy to use fewer workers instead of fewer resources.
Our tax system is hard on the environment by default, by penalizing labor and capital but letting natural resources off virtually Scot-free. But it’s also actively anti-environmental. Dozens of special favors written into federal and state tax laws shower tens of billions of dollars on high-impact industries, from strip miners to strip mallers, and high-impact activities, from speculating in land to driving alone.
Here’s how we can get taxes off our backs and onto our side.
Tax pollution and scrap business taxes. More than 3.5 billion pounds of harmful pollutants—100 million pounds of them highly toxic—flow into the Northwest’s environment each year. These pollutants kill hundreds of Washingtonians each year and contribute to reproductive disorders such as ectopic pregnancies, endometriosis, and low sperm counts.
Where pollution comes from a factory, we can tax every pound of pollution and toxic waste emitted into the air, water, or ground, building the tax on top of the existing regulatory fees that polluters pay.
But pollution that does not come out of a smokestack or other fixed source is a growing menace. Pesticides have contaminated groundwater supplies in about one-fourth of our counties, and chemicals washing off farm fields are the biggest threat to water quality in our rivers. Motor vehicles cause about half of urban air pollution, and the dirtiest fifth of vehicles create four-fifths of the smog.
To tame these non-factory polluters, we can tax agrochemical sales and tailpipe emissions. At the regular air quality inspections required in the state’s metropolitan areas, drivers can be billed in proportion to their emissions and miles driven.
These pollution taxes, set at rates that reflect the true damage pollution wreaks, would raise $1.7 billion a year in Washington. That’s enough money to eliminate the state’s third-place revenue source, the business and occupations (B & O) tax. Perverse in its impacts, the B & O tax penalizes start-up businesses and favors firms with large mark-ups. Worse, it hits different industries with different rates. Clean, service-sector companies pay at three times the rate of resource extractors. Public, nonprofit hospitals pay at five times the rate of nuclear fuel manufacturers.
Pollution taxes would double the price of many pesticides, boost prices of consumer goods such as nonrecycled paper, and make driving more expensive—$135 a year per car, on average. A few scurrilous polluters would probably leave the state or shut down, but most firms would benefit. Indeed, shifting taxes from enterprise to pollution would help strengthen Washington’s stature as a magnet for the nimble, low-pollution companies at the vanguard of the economy. Better, it would erase from our habitat some of the contaminants that cause about 5 premature deaths in Washington a day.
Tax resource consumption and slash the sales tax. To encourage conservation, efficiency, and recycling throughout the economy—and to reflect the large environmental impacts of resource extraction—governments could tax water, hydropower, timber, and minerals.
Taxing diversions of water from rivers, and its extraction from underground aquifers, would stem the enormous inefficiency in irrigation water use in the Northwest and safeguard fish and aquatic habitats. A tax of 6¢ per 1,000 gallons would generate more than $150 million a year, even as it drove a revolution in farm water conservation. Still, it would have raised the price of an order of French fries from Washington potatoes by at most 0.05¢ and the price of a hamburger with all the fixings by 4¢ or less.
To reflect the cost of decimated salmon runs and other consequences of damming rivers, Olympia could, as Idaho does, tax hydropower. Furthermore, governments could embrace deregulation and—through taxes on private dams and treasury contributions from public dams—claim any windfall profits that deregulation brought to the region’s dam operators. Just as oil royalties pay for much of Alaska’s government, hydropower royalties could help pay for Washington’s governments. At 1½¢ per kilowatt-hour, hydropower revenues would come to $1.5 billion a year.
We could also tax virgin timber and minerals to reflect environmental costs of logging and mining, such as lost wildlife habitat, worsened floods from logged-over watersheds, and acid-drainage from old mines.
Altogether, natural resource taxes would generate $1.8 billion in Washington each year, enough to replace one third of state and local sales taxes.
Washington’s extreme reliance on the sales tax give us the dubious distinction of having the most regressive tax system in North America. The poorest 20 percent of Washington households spend three times as much of their income on state and local taxes as do the richest 20 percent of households. The middle 60 percent of households pays almost twice as large a share of their income as do the rich. So moving away from the regressive sales tax would be a bold stroke for social justice.
Tax Land Values and Control Sprawl. Most Northwest jurisdictions seek to prevent sprawl through the regulatory tools of land-use planning; none applies taxes to the same task. Yet shifting the property tax off of buildings and onto land values would turn it into a powerful incentive for investment in city and town centers and adjacent neighborhoods.
Taxing sites but not buildings, turbo-charges growth management, spurring development of the most valuable locations in developed areas. A study of eight randomly selected urban and suburban neighborhoods in King County found that between 8 and 63 percent of residential land is currently vacant or radically underused. Existing zoning codes in the city of Seattle alone can accommodate an additional 113,000 housing units. Under land-value taxation, parking lots, a typical holding pattern for land speculators, give way to buildings. Supplies of apartment and office space increase. Rental prices moderate.
This reform would more than double taxes on parking lots and vacant building lots, increase taxes by up to one-quarter on car-oriented commercial strip development, and moderately reduce taxes on pedestrian-oriented neighborhood shopping districts. It would reduce taxes by about one-third on the most land-efficient forms of housing—apartments and condominiums—and by about 5 percent for most single-family residences.
To ease the traffic congestion that threatens to choke commerce in our cities, even while it squanders time, fuel, and clean air, localities could tax rush-hour driving on busy routes. Employing “phantom tollbooth” scanners, which deduct tolls from prepaid smart cards posted on cars’ dash boards, traffic tax rates would rise as rush hours approach and taper off as traffic dwindles.
The best-kept secret among transportation experts is the near universal agreement that tolls are the only real solution to worsening gridlock. Even if we in the Seattle area dig up almost $1 billion extra each year to spend on mass transit and other transportation improvements—as called for in the region’s approved master transportation plan—afternoon gridlock will spread to almost half the freeway network in the central Puget Sound region by the year 2020. The time residents spend stuck in traffic will grow threefold over the already intolerable levels; average traffic speed will fall to 21 miles per hour. Tolls, on the other hand, could tame congestion even while they generate $1 billion annually in greater Seattle, allowing repeal of virtually all local taxes except the land-value tax.
Tax greenhouse gases and slash payroll taxes. To reduce emissions of greenhouse gases and protect ourselves from worsening floods, droughts, and forest fires, we could phase in a national tax of $100 per ton of carbon dioxide, with parallel rates on other greenhouse gases. The $2.7 billion a year it would raise in Washington would offset a quarter of all payroll taxes collected in the state. That would save the typical working household $852 a year, more than enough to pay for the increased price of some goods: an extra 8 cents per gallon of gasoline, for example, and a 14 percent rise in the price of natural gas. The state, meanwhile, could implement a carbon dioxide tax of its own at $10 a ton, generating $270 million.
Lowering payroll taxes is the best deal in a federal tax shift because payroll taxes are antiwork and viciously regressive. Some 70 percent of American households contribute more in payroll taxes than in federal income taxes, and payroll taxes alone push about 1 million children in working families below the poverty line. Payroll taxes are popular because the proceeds are thought reserved for retirement benefits and unemployment, but much of the money sloshes into Congress’s general fund in the form of low-interest loans from the Social Security Trust Fund.
Overall, local and state taxes on pollution, resource consumption, land values, and traffic would yield $10.5 billion a year in Washington. Combined with existing fuel taxes, sin taxes, and other revenues that do not penalize work and investment, these new taxes could replace 86 percent of state and local revenue. We could abolish the B & O tax, and lower the sales tax by more than half!
VISION FOR A RADICALLY DIFFERENT TAX SYSTEM
It takes a little imagination to conceive of such a radically different tax system, but remember that the proponents of personal and corporate income taxes, payroll taxes, and sales taxes were all dismissed as wild-eyed dreamers a century ago. In those days, customs duties paid for most of our federal government. Our economy is changing dramatically; our tax system can too. We’re marching toward the environmental century with a tax system that tells us to conserve labor while splurging on natural resources.
The sweeping tax shift laid out above could come gradually over years, and we can make the changes incrementally, correcting and adjusting at each step along the way. History tells us one thing, though: We will have to win ourselves a rational tax system piecemeal, in both Congress and local governments. This is especially true in the state capitol, where Initiative 601 requires a two-thirds majority in each house to shift taxes. So a Washington State tax shift will probably have to come as an initiative or a series of them. Fortunately, the immediate benefits of a tax shift are huge for many citizens’ pocket-books.
If you’re part of a typical middle-class family in Washington—mom, dad, one kid and an income of about $50,000—your federal income tax bill is probably about $5,200 this year. In addition, your family probably paid about $3,800 in payroll taxes for Social Security and Medicare. (Your employer paid an equal amount, and—in case you haven’t heard—Congress has not been investing the revenue in an account with your name on it. They’ve been spending it and piling up IOUs.) You paid another $3,800 in state sales tax, plus $1,400 in property taxes. Altogether, a whopping $14,200. And that doesn’t count the business taxes, totaling perhaps $6,000, that you pay indirectly through higher prices, lower wages, and smaller returns on your retirement investments.
Under a tax shift, you’d pay tax in proportion to the damage you caused to others and the environment. If you, like many, are a careful steward of our shared Northwest, you’d save a bundle. And the greener you make your lifestyle or business, the less you’d pay. Your conscience and your bottom line would, at long last, agree.
Alan Thein Durning is executive director of Northwest Environment Watch (NEW) in Seattle and co-author, with researcher Yoram Bauman, of TAX SHIFT: How to Help the Economy, Improve the Environment, and Get the Tax Man Off Our Backs.