Democrats and some conservatives seeking new revenue to close the deficit have begun floating the idea of a tax on carbon emissions. But CBO says such a tax would hurt the poor more than middle-class and rich Americans and have to be offset by additional welfare.
Any new carbon tax imposed in exchange for lower income tax rates would hit the poor the most unless lawmakers take additional steps to offset higher costs, according to a new Congressional Budget Office analysis.
In a working paper issued Tuesday, CBO said lower rates alone would tilt relief to the rich, while targeted payments directly to poor households would lower net revenues.
The analysis made no recommendations. Still, it was published as some conservatives and Democrats say a carbon tax could address climate change and generate revenue that would allow lower tax rates.
CBO found that of seven options to mitigate the regressive nature of a carbon tax on low-income households -- including lower tax rates -- all but one would preserve the incentive to reduce carbon emissions. But only three, CBO said, would prompt employment and savings.
Past studies by CBO have estimated the higher costs of a $28 per metric ton tax on emissions would prompt higher annual consumer costs ranging from $425 for the lowest-income families to $1,380 for the wealthiest. Those amounts equate to about 2.5 percent of low income family after-tax income, compared to less than 1 percent for the highest earners.
CBO said that lower-income families devote a greater share of their spending to necessities, such as gasoline and electricity, which are energy intensive and would rise in price with a carbon tax.
Yet some families would automatically get more federal assistance if consumer prices rise. Social Security, Supplemental Security Income and food assistance are all pegged to the Consumer Price Index, and would return some of the tax costs through higher monthly payments.
Still, CBO said those offsets would amount to only about $40 per family in the lowest-income quintile of the population. Other options to offset costs for those families include lower tax rates, income tax and Earned Income Tax Credit rebates, payroll tax rebates and energy efficiency incentives.
CBO said additional payments could be made through increased food stamp benefits and higher payments to families that receive assistance through the Low Income Home Energy Assistance Program.
CBO concluded that none of the actions by themselves meet the objectives of encouraging carbon reduction while also offsetting higher costs, however.
It noted that some research indicates using the tax proceeds to offset lower tax rates -- as suggested by conservative backers -- would lower the economy-wide costs to the nation. But lower rates would still provide the wealthy with more relative cost relief, while targeted offsets would lower incentives to work and invest.
About 12 percent of revenues would have to be refunded in some way to make the lowest income quintile of households whole, and another 15 percent refunded to offset all costs to the second-lowest quintile as well.
"Choosing among options for offsetting costs that low-income households might incur under a carbon tax would involve a trade-off between various criteria," CBO concluded.
The analysis can be seen in full here.