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The US needs this no-brainer win-win tax reform

Dr. Harry G. Broadman

By Harry Broadman

(Gulf News) – What if you were told there is a simple policy that can reduce US greenhouse gas emissions today and for generations to follow?

And also promote development of renewable energy sources, temper consumption of gasoline and diesel fuel to limit road congestion in major American cities, thus recapturing lost work-hours and boost productivity? And generate significant revenues to help fund the costs of modernisation and repair of the world’s largest economy’s dilapidated and increasingly unsafe infrastructure network?

Not only would the measure provide for the achievement of all three of these objectives simultaneously, it would also actually more than pay for itself.

This is not a snake oil sales pitch. It is, plain and simple, a small contribution by anyone who buys any form of fossil fuel in the US towards payment of a premium for a national insurance policy against risks associated with the country as a whole continuing to consume fossil fuels at the current rate and fail making anything close to an adequate level of investment in the national infrastructure network.

Compared to most other advanced countries, US policy encourages fossil fuel consumption, and thus propagates the attendant costs imposed on the nation. Moreover, the status quo policy regime perversely bypasses a supremely well-targeted source of revenue to rebuild the nation’s infrastructure that is actually largely dedicated to facilitate the use of fossil fuels.

You can call it a tax, a fee or a surcharge if one wants. Substantively, the label is irrelevant, although politicians will surely argue vehemently for the least onerous sounding moniker. But in truth it is a national insurance policy.

Costs

Most people understand the concept that there are some products for which the price paid by those who consume them do not reflect the costs their use inflicts on others who do not make such purchases. Whether in real time or in some later period.

For example, the social costs of passive cigarette smoking are not fully included in the price paid by the cigarette purchaser (although cigarettes are increasingly taxed). This is analogous to the pump price of a gallon of gasoline or diesel.

Because their pernicious effects are likely to be felt most fully in the future, the social costs associated with increased emissions of greenhouse gases today are especially complex. If not curbed now, they appreciably raise the odds that our children — and their children — will inherit from us an earth with fundamentally changed physical properties.

These transformations will impose on people who are not even alive yet and thus have no “voice”, the burden to devise and implement potentially hugely expensive remedies.

Aren’t consumers in the US already paying taxes on fossil fuels? Indeed, we are. But they are not nearly high enough nor are their revenues channelled appropriately.

At present, the combined US federal and state tax rate on gasoline is significantly lower compared to the total tax rate on gasoline in every single one of the remaining 34 OECD countries, except Mexico. The total US tax rate on gasoline is about a third the size of the average OECD rate.

If US policymakers were to enact a law to charge an additional 85 cents to the total per gallon price of gasoline paid at the pump, that would bring the US in line with the average OECD rate.

An 85 cent per gallon surcharge on gasoline would generate an additional $119 billion (Dh437 billion) in annual federal revenue, and a 93 cent per gallon surcharge on diesel would generate an additional $51 billion in annual federal revenue. In total, this would yield an additional $170 billion in federal revenues annually.

How might this insurance premium work in practice? First, it would be a fixed monetary amount. Revenues would depend solely on the volume of fuel purchased.

Second, isn’t this the worst time to put on such a surcharge? Quite the contrary: today, motor fuel prices are comparatively low. Thus the “pain” induced from the introduction of a surcharge is not overbearing.

This is not July 2008, when a barrel of crude oil fetched $143 and the price for a gallon of gasoline in the US reached an all-time high of $4.11. The fact is that today we have a unique window of opportunity to act.

Real issue

Third, no matter when such a policy comes into force, won’t it contribute to slower economic growth? It’s hard to argue that imposing a surcharge, in and of itself, won’t in some way have a depressing effect on economic activity.

But the size of the proposed insurance policy premium payment is quite modest. Moreover, we’ve lived through far higher gasoline prices and they did not shave off significant growth.

The real issue about the impact on growth is how the proceeds of the insurance policy premium payments are used.

While it will be a huge challenge for Washington to meet, if this enterprise is going to be successful, the revenues collected will need to be deployed via a dedicated mechanism to both directly fund and stimulate private sector investment in state-of-the-art modernisation of the existing stock of US infrastructure.

Fundamentally, a modernised US infrastructure network will not only enhance the overall productivity of the economy, but the construction and maintenance of these facilities are comparably labour-intensive activities, which would translate into job creation and — importantly — not necessarily jobs that require the possession or acquisition of advanced skills.

The writer is on the faculty of Johns Hopkins University, and CEO and Managing Partner of Proa Global Partners LLC, an emerging markets-focused investment transactions, business growth, and risk strategy firm.

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