Congress Plots to Cap and Spend

My concern is what Congress plans to do with those revenues. In principle, the money could be put to many beneficial uses. Our government is bleeding red ink; perhaps we could use it to reduce out-of-control deficits? Or to pay for expanding health coverage? Or maybe, as many economists have suggested, to reduce payroll taxes and corporate income taxes in order to offset the economic costs of limiting greenhouse gases?

Choosing among those options would be a worthy policy debate. Unfortunately, the House bill has taken a completely different path. Rather than help taxpayers or boost the economy, House lawmakers want to give away most of the allowances for free. Electric utilities, oil refiners, and a host of other well-connected special interests would each get a share of more than $750 billion in free allowances, a truly remarkable return on their lobbying dollars.

And the problems don’t end there. The House bill would auction the remaining allowances, raising about $275 billion. Some of those revenues -- $116 billion -- are needed to offset the reduction in income and payroll taxes that comes from the introduction of a cap-and-trade program. So Congress is left with about $160 billion in additional revenue to work with.

One might hope that Congress would at least use this money to reduce the deficit or boost the economy. But no. Instead, the House bill includes $150 billion of new spending, leaving a net gain to taxpayers of only $9 billion.

In short, a $1 trillion cap-and-trade program would net about $750 billion in new revenues over the next ten years, almost all of which would then be given away or spent. As a result, the budget hawks, health expanders, and pro-growth forces have only crumbs to bargain over. From a budget perspective, the House bill is a disaster.

The Senate is now in the midst of developing its own version of this legislation. The preliminary ideas released last week were noticeably silent on the single biggest issue: how the allowances would be allocated. Taxpayers should encourage the Senate to take a more responsible course and make sure that the resulting tax revenues don’t get entirely frittered away through giveaways and new spending.

In making that recommendation, I should emphasize that auctioning all of the allowances is likely impossible as a political matter. Affected industries have enough clout to oppose anything quite that ambitious. And, indeed, one of the beauties of a cap-and-trade system (from an environmental point of view) is that politicians can use free allowances as currency to reduce opposition to the policies. In addition, it is appropriate that the bill takes some steps to help the poor adjust to the higher cost of energy that would result from the bill.

Neither of those caveats, however, takes away from my larger point that the bill does nothing to address our larger budget or economic problems. Compensating the legitimate concerns of industry and the poor might require that the government give away some allowances. But there is no way it can justify giving away or spending 99% of the allowance value.

Some political horse-trading is inevitable when bills of this magnitude come before the Congress. Unfortunately, as the House bill shows, such horse-trading can easily transform into the pure politics of pork. When the deal-making gets done, it’s important that the taxpayer have a voice at the table. But when you see so much money going out the door, you have to wonder whether the taxpayer is even in the same building as the table. Let’s hope the Senate does better.