Taxing Carbon Dividends Laser Talk

Question:  Why are carbon dividends counted as taxable income?

Answer: The 2010 Pay-As-You-Go (PAYGO) Act, [1,2] as well as procedural rules in both Houses of Congress, [3] stipulate that any bill that increases the deficit must be offset in some way. Any bill that affects the budget must be scored by the Congressional Budget Office (CBO) to be deficit-neutral over 10 years.

According to the CBO, any new tax on business will suppress other taxes they pay by 21 to 25 percent of the new revenue. [4,5] If that loss is not offset in some way, it would trigger automatic cuts to federal programs that include farm support, student loans, and even Medicare. [6]

With respect to a carbon fee, CBO has already ruled that carbon pricing, even if the cost is passed on to consumers, would be subject to the offset requirement. [7]

There are four ways for a bill to satisfy this requirement:

• Take 21 to 25 percent of the carbon fee revenue off the top and pay it to the Treasury to compensate for presumably lost future tax revenues.
• Designate the carbon dividend as taxable income, in which case the government recovers the lost revenue in the income taxes paid by households.
• Allow the automatic spending cuts, known as ‘sequestration,’ to take place.
• Find enough support in Congress to waive the PAYGO rules.

Energy Innovation and Carbon Dividend Act sponsors have agreed that the simplest, most politically viable solution is to designate the dividend as taxable income. Because personal income tax rates start at 10 percent and go up to 37 percent at the highest income, this is actually the most progressive option. It helps the most vulnerable households because they get to keep more of their dividend cash compared to wealthy Americans who are typically responsible for much higher emissions.

Related: Revenue Neutrality.

This page was last updated on 01/27/21 at 17:38 CST.