A carbon tax emerges among the ideas to reduce the federal deficit

A burly budget challenge is on the way, and some say the nation's extraordinary deficit can't be tamed unless carbon is caged, too.

Reducing red ink -- the $1.3 trillion deficit -- will be a major test of Congress' split-party makeup following elections that partly focused on runaway government spending. The incoming Republican House is pledging to slash budget outlays. Meanwhile, President Obama is studying new steps to cut the second-largest deficit since World War II. Last year's was the biggest.

Yet the penny-saved promises come as fewer pennies are available. The recession, and the tax breaks meant to ease its pain, have dipped government revenue to its lowest rate, reached periodically, over the past 40 years. That's 15 percent of gross domestic product, according to the independent Congressional Budget Office (CBO), or $2.2 trillion. The average since 1970 is 18.1 percent.

Many experts don't believe the deficit can be reduced with just spending cuts. It's too big, they say, and Social Security, Medicaid and other programs are growing. Some cash is needed.

"The 'no new taxes' pledge just doesn't line up with the numbers," Maya MacGuineas, president of the Committee for a Responsible Federal Budget, said of conservative campaign slogans.


She testified before the president's Fiscal Commission that a first-time tax on carbon emissions and other steps could provide $300 billion by 2018. The bipartisan panel is scheduled to provide a major report in December with recommendations to shrink the deficit.

"Most of the problem is on the spending side of the budget," MacGuineas said in an interview. "But realistically, there's no way to fix it solely on the spending side of the budget."

That runs counter to the themes of a conservative surge that prevailed in last week's elections. In the flurry of campaign punches that punished Democrats, one was too much spending on their watch. Another was what Republicans called a proposed "cap and tax" on carbon emissions.

"This is not the time to raise taxes," said Sage Eastman, a spokesman for Michigan Rep. Dave Camp, the top Republican on the Ways and Means Committee and a member of the president's Fiscal Commission. "I think there is a sense, especially after Tuesday ... that the problem is spending."

A companion move to reduced spending?

There are those who hope, however, that steps to reduce greenhouse gas emissions might be more attractive to Republicans and conservative Democrats when looked at through the lens of attacking the deficit.

Forget climate change. This electorate -- and the new Congress -- seems more interested in fiscal discipline. So some sense a rising opportunity for harmony between environmentalism and economics.

"When you look out at the potential sources of increasing government revenue, this has to be an especially appealing one," Michael Greenstone, former chief economist of the president's Council of Economic Advisers, said of a carbon tax or cap and trade.

"We don't have very many other opportunities to penalize activities that are harmful," he added. "We could raise marginal income tax rates, but we actually like the fact that people earn a lot of money. We don't want less of that. But we do want less greenhouse gas emissions."

The CBO, in a report this summer, noted that the Bush tax cuts are poised to expire this year -- a move that would create more revenue. But it's still not enough to close the gap between spending and government income, CBO said.

"If policymakers are to put the nation on a sustainable budgetary path, they will need to let revenues increase substantially as a percentage of GDP, decrease spending significantly from projected levels, or adopt some combination of those two approaches," said the CBO report.

Obama and congressional Democrats, meanwhile, plan to extend the expiring tax breaks for families earning less than $200,000.

"If you view this in a budget context, I think it has to seem more appealing," Greenstone said of carbon revenue. "If you accept we're going to need several hundred billion dollars of revenue over the next decade, and you need to find that revenue somewhere, this might look ... more appealing than raising income taxes."

Reviving the 'monster'

Yet new money will also be found from other sources as the economy heals, said Eastman, Camp's spokesman. As for a price on carbon?

"I don't see the commission being able to revive that monster," he said, noting that even Obama described cap and trade as an unsuccessful effort last week, saying it is just one way of "skinning the cat."

Still, energy taxes have helped the nation recover from spiking deficits before. President Clinton offered a plan in 1993 to slap a tariff on everything measured by the British thermal unit -- the Btu tax. It would have affected electricity rates and gasoline prices.

The Senate came up with an alternative: raising the gas tax 4.3 cents. No Republicans supported it then, prompting Vice President Al Gore to cast the tie-breaking vote. The legislation aimed to reduce the deficit by $500 billion, and it pushed the federal gas tax to 18.4 cents per gallon.

It hasn't changed since. Unlike other taxes, which are percentages of, say, your income, the gas tax doesn't rise with inflation. So its value is always decreasing, and so is its ability to raise revenue.

"The interesting thing about an energy tax or a gasoline tax or a carbon tax is, A. it raises a lot of revenue, and B. it allows you to reduce taxes on things like income or labor," said a former Democratic aide for the Senate Finance Committee.

"I think that anyone who's looking at deficit reduction now is going to be considering a carbon or gasoline tax. It's inescapable," the aide said. "I mean, compare our energy taxes to any other Western economy. We have the lowest energy taxation levels of any Western country by a factor of 10, basically."

'Not the moment,' yet

Not everyone is running away from that idea. Lawrence O'Donnell, the Finance Committee's staff director in 1993, when the last deficit-cutting package was passed, oversaw a project with Esquire magazine recently to balance the budget.

He convened a commission -- it really met -- with former Democratic Sens. Bill Bradley (N.J.) and Gary Hart (Colo.) and former Republican Sens. John Danforth (Mo.) and Bob Packwood (Ore.). The panel published its findings this fall sandwiched between the magazine's "Eat Like a Man" blog and "Women We Love" gallery.

The plan would achieve a $12 billion surplus in 2020, in part by hiking the gasoline tax $1 a gallon over seven years. That would raise $130 billion for the national Treasury, the panel said.

"This would not only generate significant revenue but also reduce consumption of gas, reduce carbon emission, and provide an incentive to automakers to increase the fuel efficiency of their vehicles," the panel concluded.

They also suggest that stronger fuel economy standards could help offset the higher price of gas at the pump.

It's unclear, however, how influential Esquire is among newly elected conservatives. And given the national mood about taxes, even supporters of carbon fees are doubtful that deficit hawks will consider them useful until muscular moves have been made on the spending side of the deficit ledger.

"It's maybe not the moment for it," MacGuineas, the budget advocate, said of carbon levies. "But I think we should end up there, and I think it's pretty likely we will end up there."

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