I have considered a number of environmental and other tax reforms in this paper to measure the distributional impact of changes in the tax system. A reform that raises environmental taxes and uses the proceeds to lower the personal income tax will affect consumers directly (paying the gasoline tax at the pump) and indirectly (through higher consumer prices). Using the 1992 Input-Output Accounts, I have traced through changes in intermediate goods prices resulting from taxes on these goods to changes in consumer prices. Assuming forward shifting of taxes, I allocate these taxes to households in the 1994 Consumer Expenditure Survey to measure the distributional impact using both annual income and lifetime income approaches to ranking households.

A modest tax reform in which environmental taxes equal to 10 percent of federal receipts are collected has a negligible impact on the income distribution when the funds are rebated to households through reductions in the payroll tax and personal income tax. The degree of income shifting can be adjusted with changes in how the revenues are returned to households and it is possible to increase the progressivity of the tax system with an environmental tax reform.

I then compared these reforms to a reform that shifts the tax base from income to consumption. In this case, it is difficult to maintain the level of progressivity that exists under the current income tax although ways exist by which the regressivity of the reform could be blunted. Whether the long term growth gains from consumption tax reform would offset the initial increase in regressivity remains to be determined.

It appears from this analysis that any distributional concerns about the greater use of environmental taxes can be addressed through a careful menu of tax reductions that are targeted to low income households. While it is true that environmental reforms could be designed that are quite regressive, this analysis indicates that distributionally neutral (or even mildly progressive) reforms are certainly feasible.