What Should Obama Do First? A Green Tax Swap

Mon, 10 Nov 2008 14:38:42 +0000

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.