Mass. carbon tax: Poor bang for buck

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Benson’s 'reckless' proposal – high costs, little impact


Commonwealth Magazine, Jul 9, 2019

ON THE MATTER of climate change, politicians have reached a point where they will throw anything they have at the problem without a thought to the economic consequences or, for that matter, the effects on climate change.

Thus, we get unrealistic ideas such as the “Green New Deal” and the resulting talk about getting rid of cows and grounding airplanes.

An example of this mentality is one of several proposed Massachusetts carbon taxes.  H.2810, An Act to Promote Green Infrastructure and Reduce Carbon Emissions, introduced by state Rep. Jennifer E. Benson of Lunenburg, would establish a greenhouse gas pollution charge or carbon tax. The bill would set the tax at $20 per ton of carbon dioxide equivalent in the first year and then increase the rate by $5 each year until the price is $40 per ton.

A study commissioned by the Fiscal Alliance Foundation and carried out by the Beacon Hill Institute found that the average Massachusetts household would be taxed $755 in 2022, the first year the tax is implemented. By the fifth year, that annual tax would grow to $1,263. In addition, we would see a loss of 11,090 private sector jobs in Massachusetts in just the first year and 18,240 by the fifth year. Any economic benefits of the tax would be diminutive, according to the report.

According to a flyer sent out by Benson, “Putting a price on carbon pollution will level the playing field for clean energy solutions, encourage conservation, and help the state meet its legal requirement to reduce emissions.”  The bill, she says, “will raise $400-$600 million per year for a Green Infrastructure Fund” that will help fund public transportation and “storm water and wastewater management systems.”  To offset the impact of the tax, “households and employers will be rebated 70 percent of all funds.”

Benson claims that “there is worldwide agreement among experts that putting a price on pollution to reflect the harmful impacts of climate change is the most cost-effective way to achieve the deep cuts in emissions that are necessary to protect our climate.”  Indeed, a carbon tax is the policy preferred by some economists.

But what the representative doesn’t say is that economists see a carbon tax as a replacement for the hodgepodge of climate measures that now exist in the form of wind, solar, and electric car subsidies. Benson says nothing about eliminating these measures.  She says nothing as well about the fact that economists recognize a carbon tax – like any tax – to be harmful to economic activity.  The task in determining the correct carbon tax is to achieve the right balance between climate improvement and the resulting harm to the economy.  Her flyer says nothing about that harm or about what her bill would accomplish in terms of reducing worldwide GHG emissions.

The report by the Beacon Hill Institute indicates the tax would cause a loss of $2.254 billion in state production, along with $925 million in private investment and $1.950 billion in disposable income.

Benson wants to rebate 70 percent of the revenue raised by the tax to households and businesses.  What she doesn’t recognize is that, by shrinking the economy, her carbon tax would cause the state to lose revenues from existing taxes.  We find that the carbon tax would raise $1.253 billion in new taxes but cause the state to lose $326 million in existing revenue.  If she uses 70 percent of the remaining revenue to compensate households and businesses, that will leave barely enough for her infrastructure fund.

Also, the inevitable loss of production and jobs makes it an empty promise for her to claim that low to middle-income households “will get back more in rebates than they pay in any cost increase.” Because the contraction in the state economy will reduce household disposable income by $1.950 billion, the average Massachusetts household will lose $755 in 2022, the first year the tax is implemented. The household taxes increase each year. By the second year, the tax is at $911, the third year it’s at $1,075, the fourth year at $1,095 and the fifth year at $1,263.

And how successful will the tax be in mitigating climate change?  Massachusetts accounts for only 0.12 percent of global greenhouse gas emissions.  The tax would reduce global emissions by 0.0027 percent in 2022.  Practically speaking, this diminutive benefit would not mitigate sea water levels, cure asthma, or impact the daily lives of any person or living creature on earth. Benson’s carbon tax does not factor the most obvious barrier, which is that Massachusetts cannot control what air enters the state and what air leaves the state.

We used the much-respected “DICE”model developed by Nobel Laureate William Nordhaus to estimate the economic benefits of this reduction and found that those benefits would come to $57 million in 2022.  Subtracting from the $2.254 billion in lost output, we are left with a net social cost to the economy of $2.197 billion.

Benson’s proposed Massachusetts carbon tax is another example of a reckless policy proposal, echoing many points found in US Rep. Alexandria Ocasio-Cortez’s Green New Deal, which is clearly conceived without a thought to its consequences.  Massachusetts residents who want to do something about climate change should shift their attention to the federal level, or internationally where the possibility of effective change is greater.

David G. Tuerck is president of the Beacon Hill Institute and professor of economics at Suffolk University. Laurie Belsito is the legislative director of the Fiscal Alliance Foundation.