This post is excerpted from my recent article in the Fall 2015 issue of Resources magazine.
A carbon tax is a cost-effective way to reduce greenhouse gas emissions, but the resulting higher prices for home energy and gasoline as well as for food and other energy-intensive goods and services can reduce households’ purchasing power. Low- and moderate-income households feel the budget squeeze most acutely; they spend a larger share of their budgets on these items than do higher-income households and are least able to afford new fuel-efficient vehicles, better home weatherization, and energy-saving appliances.
Fortunately, well-designed carbon tax legislation can generate enough revenue to fully offset the impact on the most vulnerable households, cushion the impact for many other households, and leave plenty to spare for other uses—without blunting the price signal that is essential for achieving cost-effective emissions reductions. Providing lump-sum rebates to households is the best way to protect low-income groups. Only a relatively small portion of carbon tax revenues is needed to fund such a rebate program, leaving most of the revenue available for other purposes.
As I explore in an RFF issue brief released last month, an efficient and effective rebate design can build on existing tax- and benefit- delivery mechanisms to reach as many households as possible, especially those with the lowest incomes. Under the approach proposed by my organization, the Center on Budget and Policy Priorities (CBPP), all households of a given family size would receive the same lump-sum amount but through different means:
- Lower-income working households would receive it through a refundable tax credit.
- Beneficiaries of Social Security and certain other federally administered benefit programs would receive it as a supplement to their regular payments.
- Very low-income families would receive it through state human services agencies using the electronic benefit transfer (EBT) system already used to deliver food stamp benefits under the Supplemental Nutrition Assistance Program (SNAP).
All three delivery mechanisms would play a critical role in providing rebates to low-income families. CBPP calculations, using 2012 data, show the following for households in the lowest income group:
- About 47 percent received benefits from Social Security and other agencies and could have qualified for an energy refund for all or part of the year through the federal benefits delivery mechanism.
- About 57 percent received benefits through SNAP and could have qualified for an energy refund for all or part of the year through the state human services delivery mechanism.
- About 21 percent had earnings that would have qualified them for a full or partial tax credit.
The EBT mechanism is particularly important for low-income families with children. About one-third of all low-income households with children would receive no rebate or only a partial rebate if this mechanism were not employed.
The percentages above sum to more than 100 percent coverage, indicating that under this delivery approach, some people could qualify for more than one rebate because they participate in one or more of the relevant programs and/or also file an income tax return. Coordination mechanisms would be needed to ensure that people are not overcompensated. For example, state human services agencies would not provide climate rebates to individuals who are receiving Social Security, Supplemental Security Income, veterans’ benefits, or Railroad Retirement benefits.
Delivering a climate rebate through existing state eligibility systems and delivery mechanisms would be far less costly to set up and administer than virtually any alternative, while ensuring that the lowest-income families would not be left out and would receive rebates on a monthly basis throughout the year.
About the Author
Chad Stone is the chief economist at the Center on Budget and Policy Priorities. This work was conducted as part of Considering a US Carbon Tax: Economic Analysis and Dialogue on Carbon Pricing Options, an RFF initiative. http://www.rff.org/carbontax