Whatever Shall We Do With All Of This Money?

California is figuring out what it’s going to do with its carbon cap and trade funds:

In the Assembly summary’s pp. 23-24 narrative description of allocations for 2015-16 and beyond, the percentages are the same as in the June 12 document but the narrative is more filled out. There are new clarifying references to these being continuous appropriations, including that the budget proposal “contains statutory language to continuously appropriate 60 percent of ongoing Cap and Trade funding, beginning in 2015-16.”

The Affordable Housing and Sustainable Communities program, still set to receive 20% of ongoing cap and trade funds, half of it for affordable housing, is described as “a grant program administered by the Strategic Growth Council.” The new text, however, doesn’t mention the finer detail we’d heard Friday about rules for administration of these funds by the SGC.

The new document does confirm what we’d heard on Friday about agencies to be entrusted with the transportation and transit programs.

New in today’s document is this sentence: “Allocates Cap and Trade revenue in 2014-15 and contains statutory language to continuously appropriate 60 percent of ongoing Cap and Trade funding, beginning in 2015-16.” Today’s document also refers repeatedly to continuous appropriation of the percentages set for the second year.

I am not ideologically opposed to imposing a carbon premium (either a tax or cap and trade program, preferring the former). I have very little optimism that it will do anything about global warming or will even do all that much to change our habits. However, you tax what you don’t want, and we want people to use less carbon.

Where I end up gritting my teeth are the sorts of debates this sparks. What do we do with the money? Given my skepticism towards carbon premiums actually getting us very far towards where we want to go on the global warming front, it does feel to me at some point like the money it raises is not a biproduct of the premium, but the primary point of it. Or, even if it doesn’t start out that way, it can become that very quickly. In California, we’re talking about billions of dollars. That’s a whole lot of money. Even more, it’s money that is perceived to be free money, since it’s not withheld directly from paychecks or assessed in a transparent manner, when it very much comes straight out of the pockets of Californians.

There is also the bit about the problem with pigouvian taxes, which is that the goal is to get people to do less of whatever it is that you’re taxing. Once you’re committing this money to budgets, it’s hard to scale back when and if the taxes have the intended effect. This is the point that we reached with cigarette taxes, where state governments are talking about “lost revenue” from such taxes having their intended effect. While that doesn’t make such taxes or premiums a bad idea, it does point to the problems they represent as a fundraising mechanism.

I would feel most comfortable with a carbon premium where (a) the actual level of commitment from the government and (b) lobbying to get a hold of that money is kept are both kept to a minimum. Nothing cocks my eyebrow quite like a response to “What will we do with this money?” than “We will use it to fund things we support.” Sometimes these are directly environmentally related (renewable energy), related-but-targeted (transit), or barely-related (affordable housing). Most suspiciously, they’re all things proponents would almost certainly support with or without a premium. They’re all likely things that they are going to want to continue to support when and if consumption and revenue fall except that by then they have status quo bias in their corner.

My own preference to answer the question of how we will spend the money is in one of three ways, all with their pluses and minuses:

This answer should surprise nobody, but there it is. Given that the money being raised is ultimately going to come from the people of the jurisdiction (California in this case, the whole country in a hypothetical), it seems fair that they get the money back. An immediate criticism I have run across is that people will just spend their money on things that will consume power, but this argument can ultimately be reduced to saying that people having money is a bad thing. Ultimately, such a system will favor those who spend less of their income on things that consume more power, and punish those who spend more of their money.

The strongest argument against straight tax cuts is that, depending on the jurisdiction, taxes are progressive and the bulk of the savings would go to the wealthy. I don’t know how true this is for California, but it is true for the nation as a whole. Given that carbon premiums would be regressive as a whole, this would be a wealth transfer in the wrong direction.

That carbon premiums are regressive is a very important to our understanding of carbon premiums as a concept. It could be an argument in favor of things like affordable housing or food stamps, but these only target some of the poor. At best, only target those that we declare poor. At worst, those who win a lottery to be able to live in affordably-built housing. In between, those who live in places where housing affordability is a problem against those who don’t. There is also the bigger issue of diminishing returns as the subsidies ultimately, hopefully, collect less money because we’re hopefully using less energy.

A bonus of lowering taxes is that taxes can be raised. It’s not always easy, and that’s a strike against it, bbut easier than ending an affordable housing project. So there is less of a permanence hazard.

But even so, I find myself less enthusiastic about paying for it with tax cuts broadly. Certainly at the national level, where progressivity/regressivity is an issue. Lowering state sales taxes, though, might be a different matter.

This is similar to the previous one, except that it negates the progressivity/regressivity problem and makes the diminishing returns more palatable. Basically, instead of lowering tax rates, you simply include a rebate with tax returns. It would be a single dollar amount on a per-person basis. For liberals, this has the advantage of being income-redistribution in its most pure form. For conservatives, it alleviates concerns that the whole enterprise is about enlarging government.

Since the amount of the rebate would be entirely dependent on the cash receipts of the previous year, it could fluctuate, and diminish, with collections. I’m not sure whether we would want influence the W4 withholdings so that they get the money all year around or whether it’s simply part of a check that they get along with their return (or deducted from their debt).

Unlike targeted relief in the form of affordable housing or food stamps, it would be universally applied and there would be less lobbying and jockying to get a hold of that money. It becomes more straightforwardly about altering behavior instead of raising revenue without a strongly regressive nature. It would most specifically reward those who use less energy, and nudge those who use more.

At the federal level, reducing the deficit or paying down the national debt. At the state level, paying off bonds early where eligible.

Whether this is a legitimate aim seems to mostly depend on who is in power, but I consider it a worthy goal all the same. It is also comparatively unsusceptible to the problem of diminishing returns. It’s the equivalent of paying down a tax return towards the principle of a mortgage. You can pay as much or as little extra on the principle as you want.

The first concern I have here is that the government would simply keep these receipts in mind when laying out budgets. Money is, after all, fungible. When states imposed or increased cigarette taxes “for education” it’s unclear how much of that actually went to education, and how much education funding that would have gone to schools instead went somewhere else because they knew that the schools were getting tobacco money.

The second concern is that this does fall into the regressivity trap, at least in an abstract way. Ultimately, the debt accrued to the nation as a whole is accrued in proportion to who pays the taxes. So the benefits of not incurring that debt fall to those who pay the most taxes: the wealthy. Meanwhile, the money is coming from everybody in a somewhat regressive fashion.

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Among the three options, my preference is for tax rebates. How politically palatable that is, however, is questionable. Even though I believe it has benefits for both the left and the right, it has drawbacks of the same. Liberals would be sacrificing money that they think would be more wisely spent in a centralized fashion on worthwhile projects. Conservatives would look at it through the prism of makers/takers and balk. The end result being what happened in California or what hasn’t happened nationally. The Democrats will pass the taxes with minimal Republican support – or the support of Schwatzenegger Republicans – and the money will be directed towards other Democratic goals and constituencies. Or the Republicans will prevent it from happening altogether, and it won’t happen.