Carbon Tax Shifts and the Revenue-Neutrality Dilemma

23:1 Florida Tax Review 293, 2019

56 Pages Posted: 27 May 2020

See all articles by Rory Gillis

Rory Gillis

University of Toronto, Faculty of Law

Date Written: 2019

Abstract

Over the past two decades, numerous experts and politicians have proposed “revenue-neutral carbon tax shifts,” under which a government implements a carbon tax and uses the resulting revenue to cut other taxes by an equal dollar amount. These proposals commonly include legal or political mechanisms to bind governments to revenue neutrality over time. This Article’s central claim is that revenue neutrality suffers from conceptual and epistemic confusion that should lead to reconsideration of the policy merits of carbon tax shifts. To illustrate the argument, the Article provides the first retrospective review in the legal literature of carbon tax shifts from four jurisdictions, two of which were implemented and then repealed, and two of which were rejected by voters at the ballot box. In each jurisdiction, the carbon tax shift was afflicted by confusion between two substantially different conceptions of revenue neutrality, which can be termed “backward-looking” and “sideways-looking” revenue neutrality. This confusion is difficult to resolve because the choice between the two conceptions presents governments with a dilemma: backward-looking revenue neutrality is normatively undesirable, while sideways-looking revenue neutrality is difficult to enforce through legal and political mechanisms. This Article argues that the dilemma should be taken into account when choosing between carbon tax shifts and alternative uses of carbon pricing revenues. The dilemma also has implications for revenue-neutral tax reform in other contexts: it is far harder to separate the question of “how to tax” from the question of “how much to tax” than is commonly understood.

Keywords: Carbon Taxation, Carbon Pricing, Carbon Tax Shifts, Revenue Neutrality, Tax Reform, Public Finance

JEL Classification: Q54, H23

Suggested Citation

Gillis, Rory, Carbon Tax Shifts and the Revenue-Neutrality Dilemma (2019). 23:1 Florida Tax Review 293, 2019, Available at SSRN: https://ssrn.com/abstract=3587725

Rory Gillis (Contact Author)

University of Toronto, Faculty of Law ( email )

Toronto
Canada

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