Congress Plots to Cap and Spend

Congress is working on a piece of legislation that would increase taxes by almost $750 billion over the next ten years and would then spend virtually all that money, ostensibly in pursuit of a key public policy goal.

You might think I am referring to the health care bills that have been dominating the headlines. Those bills do include substantial tax increases, but not even the House bill gets up to $750 billion. No, the biggest tax-and-spend item on the agenda is the effort to reduce the threat of climate change.

A few months ago, the House of Representatives passed, by a narrow margin, a bill to limit the emissions that cause climate change. The bill’s key feature is a cap-and-trade system for greenhouse gases, such as the carbon dioxide emitted by coal-fired power plants and oil refineries. That system would set a national cap on greenhouse gas emissions and would require emitters to own permits (called allowances) to cover their emissions. Emitters would be free to trade these allowances among themselves, thus encouraging them to pursue the most cost-effective ways of reducing emissions.

The allowances are worth big money. According to the Congressional Budget Office (CBO), the allowances created by the House bill would be worth almost $1 trillion over the next decade, and presumably even more in subsequent decades.

The creation of a cap-and-trade system would thus impose $1 trillion in new taxes on the U.S. economy over the next ten years. And I don’t just mean that rhetorically. The CBO itself characterizes the creation of the allowances as a new source of tax revenue. And it’s right to do so. If Congress created these allowances and then auctioned them off, it would generate $1 trillion in new revenue for the government.

The need to pay for those allowances would, however, put a dent in corporate profits. And some firms would cut back production and either lay off workers or reduce their pay. As a result, the government would receive lower revenues from income taxes (both individual and corporate) and payroll taxes. So the $1 trillion in new allowance revenue would be partly offset by a reduction in other taxes. CBO estimates this effect at about $250 billion over ten years.

The creation of a cap-and-trade system would thus net about $750 billion in additional tax revenues. Not quite a trillion dollars, but still serious money, even in Washington.

I have no objection to the government raising that kind of money through a cap-and-trade system. Climate change is a serious problem and a well-designed system could reduce environmental harm while minimizing costs to our economy.