Economic Policy & Taxation


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Tax shifting refers to the reform of tax systems in order to encourage sustainable activities, discourage unsustainable activities, and improve overall tax equity. The concept is based on the idea that our current economic system fails to account for environmental damage by sending inaccurate and incomplete price signals and that the tax system creates counterproductive incentives. Put simply, tax-shifting seeks to reduce taxes on productive activities (labor, capital formation) and increase taxes on unproductive ones (pollution, consumption of resources), while also promoting tax equity.

Most tax-shifting proposals are revenue neutral and are generally designed to increase revenue from new, untaxed or undertaxed sources and reduce current taxes to yield the same dollar return to the government. The rationale for revenue neutrality is to address the political resistance to raising overall taxes and to assure adequate revenue for government services. Other objectives of good tax systems - those of predictability and stability - must also be built into tax-shifting plans. Projecting the expected returns from new forms of taxation can be technically challenging, especially in estimating how much the desired incentive effect will "work" and thus reduce revenue. Although there are multiple rationales underlying the tax-shifting concept, the most compelling include tax equity, environmental improvement, and improved economic efficiency.

Initially, it may seem simple to suggest that if our neighbor's activities cause environmental damage, then he or she should bear the cost of that damage. But there are political and social constraints on the implementation of that idea. For example, many Maine workers are employed in old manufacturing industries. Textiles, paper and shipbuilding are three examples that have historically paid better than average wages and benefits, yet are under fierce national and international competition, and are relatively heavy energy users. Tax-shifting proposals which might appear to threaten the economic sustainability of these industries, and the financial benefits they bring to their communities, would likely face strong political opposition.

However, one way of addressing these political and social concerns is suggested by a law recently enacted by Germany's parliament adopting tax-shifting ideas. The new law, effect on April 1, 1999 will increase taxes on electricity, gasoline, fuel oil, and natural gas. The increased revenues will be used to reduce social security taxes. However, energy-intensive industries and the agricultural and forestry sectors will pay only 20% of standard tax rates. The law also provides for refunds to companies that pay more in energy taxes than they receive social security tax reductions; an exemption for electricity plants achieving greater than 70% efficiency; an exemption for electricity from renewable sources, except for renewable power sold on the grid; an allocation of revenues from taxes on renewable electricity to fund the development of renewable energy; an exemption for electricity used for trains; rate reductions for natural gas used for vehicles; and an exemption for certain apartment residents.

The role of tax-shifting in fostering greater economic efficiency for the state as a whole should not be overlooked. When tax and other financial systems divorce individual decisions from the full costs of those decisions, then inefficiency of state-wide systems may result. An example of this can be seen in sprawl and transportation issues, where many of the direct costs resulting from individual decisions (such as how much to drive, what type of vehicle to drive, and where to live and work) are not incurred directly by the decisionmakers. Instead, the population as a whole pays indirectly through property taxes, sales and income taxes, or other mechanisms. If individuals had to directly account for the full costs of different options under consideration, there would be greater incentive to choose the least costly option. On a state-wide basis, this would help create more effective systems of transportation, housing, energy supply and other public needs.

Maine presents some unusual opportunities to focus political and public attention on this issue. Maine has been among a handful of states that have developed environmental policies in several arenas more assertively than the Federal government. As in many states, there has been recent concern that opportunities for additional cost-effective reductions in pollution through "command and control" regulation may be limited, and that the "next generation" of environmental protection will need to come through market-based strategies and incentives.

The Mainewatch Institute and the Maine Center for Economic Policy recently completed a two-year study of the use of tax-shifting and other financial incentives to address environmental priorities. The study analyzes how the Maine tax code presently impacts environmental objectives, how tax policy might be used alternatively to promote environmental objectives, what the economic and distributional effects of such tax changes might be, and how any negative impacts might be mitigated. The goals of the project are not simply to produce a better academic understanding of these issues, but to also use those findings to make policy recommendations and distribute them in ways to ensure that policymakers, advocates, and the general public have the tools, inclination and support from many constituencies to reframe tax policy.

While much of the literature focuses on options that address large-scale issues, such as energy use and greenhouse gas emissions, the Mainewatch Institute study also examines state-based initiatives of lower complexity, as exemplified by Maine's bottle bill. These state-based issues hold the most promise for achieving results in the near-term, while testing and demonstrating the effectiveness of the tax-shifting concept.


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