Satisfying the PAYGO Law Laser Talk

This page was updated on 05/31/19 at 19:36 CDT.

Question:  How will the Energy Innovation and Carbon Dividend Act be scored by the Congressional Budget Office?

Answer:  There is a law – the 2010 Pay-As-You-Go (PAYGO) Act [1,2] – stipulating that any bill that increases the deficit must be offset in some way. According to that law, any new tax on business – which a carbon fee would be in legal terms – must be scored by the Congressional Budget Office (CBO) for its PAYGO impact. They’ve already ruled that 22 to 25 percent of the revenue from such a tax will be lost from other taxes businesses would pay, even if the cost of the new tax is passed on to consumers. [3,4]

Returning 100 percent of carbon fees as tax-free carbon dividends would put cash back into the economy, but CBO has ruled that it would not satisfy PAYGO, [5] and would trigger automatic cuts to federal programs that include farm support, student loans, and even Medicare. [6]

There are technically four ways to meet this challenge:

• Find some offsetting revenue which doesn’t itself trigger another 25 percent ‘haircut’.
• Allow the automatic cuts, known as ‘sequestration’, to take place.
• Designate the carbon dividend as taxable income, in which case the government recovers the ‘lost’ revenue in the income taxes paid by households.
• Find enough support in Congress to waive the PAYGO requirement.

CCL believes that the simplest and most politically viable solution is the one specified in the Act: designate the dividend as taxable income. Because the U.S. income tax structure is progressive, this option helps protect the most vulnerable households from undue burden, because they pay income tax at a lower rate than wealthier Americans. The offset would automatically increase along with the carbon dividend, no means testing would be required, and no programs would be cut.

Related: Revenue Neutrality.