A DISTRIBUTIONAL ANALYSIS OF AN ENVIRONMENTAL TAX SHIFT: Data 5

The reason that electricity prices do not rise as much as do natural gas prices is that while 79 percent of the share of industry goods used by the natural gas industry are subject either directly or indirectly to the carbon tax, only 37 percent of the share of industry goods used by the electricity industry is subject to the tax. Other important industrial inputs into the electricity industry include construction (22 percent) and services (12 percent).

The motor fuels tax increases the price of gasoline over 13 percent. The remaining tax increases the price of other goods quite modestly with the largest increase occurring in various transportation services (mass transit, taxicab, airline fares) with an increase of 0.6 percent. Air pollution taxes raise electricity and natural gas prices by 8 and 6 percent respectively while raising the price of other goods modestly. Jewelry and watch prices rise by nearly 4 percent due to the use of VOCs in their production. The virgin materials tax has a modest impact less than 1 percent. Taken as a group, these taxes predominately raise the price of energy for consumers. Except for jewelry and watches, consumer price increases for other goods rarely exceed 2 percent.

I use these revenues to fund three tax changes in the payroll and personal income tax.

Proposal Amount(Billions)
Payroll Tax 71.2
$150 Refundable Tax Credit 34.9
4% Personal Income Tax Reduction 19.3
TOTAL $125.4

First, I exempt from the OASDI payroll tax the first $5,000 of tax base for each worker. For workers earning less than $5,000 of covered wages, I exempt them from the tax, both at the personal and business level. Based on data in the Consumer Expenditure Survey on the distribution of workers, this will reduce payroll tax collections by $71.2 billion. Next, I implement a refundable $150 tax credit for each exemption taken in the personal income tax. Based on the 232.7 million exemptions taken in 1994 (SOI, Winter 96-97), this will cut tax collections by $34.9 billion. Finally, I implement an across the board income tax cut of 4 percent. This reduces tax revenue by $21.3 billion in my data. Table 5 summarizes the tax cuts that are funded by the new environmental levies.