Excerpt from Tax Shift

From Chapter One: "What We've Got"

Ever since the Boston Tea Party--which was, after all, about taxes, not tea--tax revolts have shaped politics on this continent. No wonder. Taxes not only claim billions of dollars from citizens; they also influence billions of daily decisions shaping, or misshaping, the economy.

In general, economics tells us that when you tax something, you get less of it. Our problem is that we tax things we want more of, such as paychecks and enterprise, instead of things we want less of, such as toxic waste and resource depletion. Naturally, we get less money and more messes. Tax Shift is about doing the opposite--removing taxes from "goods" and putting them on "bads." This book is not about raising or lowering taxes overall. Whether you think government is too big, too small, or just right, tax shifting is a revolt that makes sense: it gets taxes off our backs and onto our side.

A tax shift would allow us to reduce or eliminate many existing taxes: regressive property, payroll, and sales taxes that are hardest on the lower and middle classes; enterprise-killing business taxes; even the mind-boggling personal income tax. Instead, by building on a rudimentary framework of existing minor levies, we could tax actions that corrode the public good. We could tax emissions of deadly fine particles, greenhouse gases, and other air pollutants; discharges of toxic heavy metals and other water pollutants; and the manufacture and use of pesticides and other hazardous chemicals. We could tax away most traffic jams, by charging drivers for use of major routes at rush hour. We could protect natural ecosystems by taxing the pumping of fresh water, the impounding of rivers behind dams, and the felling of virgin timber. Finally, by moving the weight of the property tax off buildings and onto urban land values, we could promote the growth of compact, walkable neighborhoods and slow the creep of our suburbs into farms and forests.

Shifting the tax burden would send out powerful signals--signals that would reorient consumption and production in our homes and businesses. Tax shifting would harness the profit motive for environmental ends and wring out the waste of resources. Governments would still get their money, and--because taxes on "bads" do not bog down the economy as much as many existing taxes on "goods"--employment levels and incomes would rise.

In economic terms, a tax shift would take taxes off labor and capital and put them on the third factor of production--resources, the gifts of nature. Labor refers to people working. Capital means physical objects created by people, such as buildings, tools, and machinery. The gifts of nature are resources not made by people, such as air, forests, fossil fuels, land, metals, water, a stable climate, and rivers and other habitats. Taxing labor and capital tells businesses and households to scrimp on workers and tools--in other words, to practice underemployment and under-investment. Taxing the gifts of nature (or, more precisely, taxing actions that degrade the gifts of nature) tells people to conserve these gifts.

Taxes on resources correct one of the most glaring flaws of market economies: blindness to environmental costs. Failure to charge for the use of the atmosphere as a receptacle for poisonous gases, for example, results in too much air pollution. Failure to charge for the disruption of watersheds results in too many floods. Yet for individual firms, there is no place in the ledger for the environmental costs of production that fall on others--costs such as damage of a worker's DNA that causes disease decades later, the draining of a wetland that offers wildlife habitat, or the release of toxic substances so mobile they eventually permeate the breast milk of women in the Arctic. Environmental taxes put these costs--or at least crude monetary approximations of them--on the books.

The prospect of aiding both economy and environment has sparked modest tax shifts in the Netherlands, Spain, the United Kingdom, and three Scandinavian countries since 1991. In North America, this trend has yet to take hold. The history of tax politics on this continent suggests that adopting a reform for the first time in the first place is harder than spreading it to ten others, so road testing a tax shift on this side of the Atlantic could quickly set off similar reforms across the United States and Canada.

This book attends to one possible test plot--the Pacific Northwest, defined as the region whose rivers run into the Pacific Ocean through North America's temperate rain forests. Home to 15 million people, this region stretches from Alaska's Prince William Sound to the redwood coast of California and inland to headwaters as far east as the Rocky Mountains. More than twice the size of Texas, it encompasses British Columbia, Idaho, Oregon, and Washington, along with neighboring parts of Alaska, California, and Montana (see map inside front cover). The region combines traditions of political innovation and environmental conservation.

In the Northwest, taxes claimed $107 billion in 1996, one-third of the gross regional product. (When we report data for the Northwest as a whole in this book, we exclude the states only partially within the region.) Some $89 billion of that money came from taxes on labor and capital, mostly in the form of payroll taxes, personal income taxes, corporate income and other business taxes, and sales and property taxes. Just 17 percent of revenue collected came from taxes on resources. The largest of these were the part of the property tax that falls on land, rather than on buildings, and the gas tax. Others included health-oriented taxes on alcohol and tobacco, small energy taxes, pollution taxes, and motor vehicle fees. Elsewhere in the tax codes, meanwhile, environmentally damaging activities including driving, logging, and mining received special subsidies. (Sightline describes these subsidies in a companion volume, Hazardous Handouts: Taxpayer Subsidies to Environmental Destruction.)

Because taxes on labor and capital are high in the Northwest as elsewhere, the prices of housing and labor are higher than they should be. So are the prices of things that use labor intensively, such as medical care and education. In both the United States and Canada, the combination of income taxes and payroll taxes (such as unemployment insurance) puts a tax burden on paychecks that usually exceeds 30 percent. For a worker to get $1,000 in after-tax pay, she and her employer must write checks worth $300 or more to the government. These taxes effectively penalize hiring and working and push the economy to use fewer workers instead of fewer natural resources.

Levies on capital and labor squelch investment and worker effort. Every dollar raised through taxes on capital or labor reduces economic output by dampening productivity. Overall, taxes affecting the Northwest cause so-called deadweight losses of about 24 cents per dollar collected. All together, these losses come to approximately $26 billion annually in the region, equal to 8 percent of economic output.

A tax shift revolt in the Northwest may not come easily. The idea is still new and unfamiliar; existing taxes, though products of a history of errors, have the force of custom behind them. Fortunately, reforms need not occur all at once. A tax shift can proceed in steps, and each step will strengthen the economy while helping the environment. In the end, the practical challenge is one of public education and political organizing, and the organizing may come more easily than expected. After all, we have much to lose--needless death and suffering, unnecessary poverty and unemployment, endangerment of the landscape, and tax laws that punish virtues while rewarding vices.

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