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FACT CHECK: CAP-AND-TRADE IS A TAX
September 22, 2009

Posted by Matt Dempsey matt_dempsey@epw.senate.gov

Our post tonight is in response to a request by Josh Nelson of the Huffington Post, who asked us to respond to the post Alexander claims that cap-and-trade will cost consumer $1,761 a year. Josh reached out to us for a statement aftter he read Senator Inhofe's press release OBAMA BREAKS MIDDLE CLASS TAX PLEDGE.

FACT CHECK: CAP-AND-TRADE IS A TAX

First, it is undeniable that the whole point of cap-and-trade is to raise energy prices.  As the Congressional Budget Office (CBO) put it, higher prices are “essential to the success of a cap and-trade program because they would be the most important mechanism through which businesses and households would be encouraged to make economically motivated changes in investment and consumption that reduced CO2 emissions.”  As then candidate Obama stated in January 2008, "under my plan of a cap-and-trade system, electricity rates would necessarily skyrocket....Because I'm capping greenhouse gases, coal-powered plants, you know, natural gas, you name it, whatever the plants were, whatever the industry was, they would have to retrofit their operations. That will cost money, they will pass that money on to consumers."

If that doesn’t quite get the point across, consider Peter Orszag, when, as director of CBO, he said that under “a cap-and-trade program, firms would not ultimately bear most of the costs of the allowances but instead would pass them along to their customers in the form of higher prices. Such price increases would stem from the restriction on emissions and would occur regardless of whether the government sold emission allowances or gave them away” [emphasis added].

So cap-and-trade is a government mandate that raises energy costs.  This is not an isolated view. Rep. John Dingell (D-Mich.) said, “Nobody in this country realizes that cap and trade is a tax and it’s a great big one.”  Rep. Charles Rangel (D-N.Y.), chairman of the House Ways and Means Committee, said, “Whether you call it a tax, everyone agrees that it's going to increase the cost to the consumer."  In short, if costs don’t go up, the whole point of the plan—to encourage people to move away from fossil fuels—collapses. 

Now let’s consider the cost estimates from the Treasury Department, which came to light only after a FOIA request from the Competitive Enterprise Institute.   Treasury produced redacted documents showing that cap-and-trade would cost somewhere between $100 and $200 billion.  If you divide those costs by the number of U.S. households (113.5 million), the result is a cost of $1,761 per year per household. 

Environmentalists and the Administration cried foul, first arguing that this was an old proposal that did not reflect the House-passed Waxman-Markey bill, which gives away a large portion of allowances (at least in the early years).  This is an interesting argument, because it ignores the fact that President Obama continues to assume over $600 billion in revenues from cap-and-trade in his FY 2010 mid-session budget review.  Again, that’s over $600 billion from a plan that uses a 100 percent auction.   

But let’s put that aside, and move to Waxman-Markey.  Environmentalists complained the $1,761 figure was misleading because Waxman-Markey gives climate revenues back to consumers, so they won’t pay the costs of cap-and-trade. 

Then things changed.  Under pressure from Republicans, Treasury release unredacted documents, which showed that cap-and-trade would cost $400 billion.  That means households would face a stiff tax of $3,522 a year.   Treasury concluded that cap-and-trade could yield additional "revenues up to several percentage points of annual GDP (i.e. equal in size to the corporate income tax)." According to IRS figures, corporate income tax revenues totaled $395.5 billion in 2007.  This is a massive cost to the economy.  This is a massive tax on consumers. 

As noted above, cap-and-trade supporters argue that this is not a tax, because the Waxman-Markey bill returns cap-and-trade revenues to consumers.  Stephen Seidel, vice president for policy analysis and general counsel for the Pew Center on Global Climate Change, put it this way: “What [Treasury] was looking at was a situation where 100 percent of the permits were auctioned, and ignored what would be done with revenue,” he said. The Waxman-Markey bill “uses revenue to offset cost to consumers.” Seidel concluded, “The bottom line is that it goes back to the consumers.”

Let’s consider Seidel’s argument.  First, those redistributed funds won’t cover the entire cost of cap-and-trade, especially for those in the Midwest and other regions that rely heavily on coal-fired electricity.  According to analysis of Waxman-Markey by the National Black Chamber of Commerce, “It is not possible to avoid these costs through any free distribution of carbon allowances.  Although the wise use of revenues from an auction or carbon tax can ameliorate impacts to some segments of the economy, the cost of bringing emissions down to levels required by the caps cannot be avoided.”

One must also remember that under the Waxman-Markey bill, middle income consumers get no help on gasoline and food prices, which will necessarily increase.  Bob Stallman, President of the American Farm Bureau, put it this way: “Any climate change legislation will also impose additional costs on all sectors of the economy and will result in higher fuel, fertilizer and energy costs...”  Furthermore, according to the Energy Information Administration (EIA), Waxman-Markey will increase gasoline prices by 20 cents per gallon in 2020 and 35 cents a gallon by 2030.  EIA stated that, “Transportation costs, however, do increase significantly on a per-household basis since there are no provisions designed to dampen motor gasoline price impacts.”  Furthermore, the analysis by the National Black Chamber of Commerce “reveals that businesses and consumers would face higher energy and transportation costs under [Waxman-Markey], which would lead to increased costs of other goods and services throughout the economy. As the costs of goods and services rise, household disposable income and household consumption would fall.”

 

Siedel also rests his claim on the precarious assumption that Congress will use revenues raised through cap-and-trade for their intended purpose.  Declan McCullagh of CBS News put it best: “The tax revenue might end up being directed at income tax cuts (or rescuing kittens and feeding orphans, for that matter), or it could end up being wasted on boondoggles.  If it is returned to American citizens, it's unlikely to be a wash: some people will end up paying much more in taxes, some will pay a little more, and some will see a net benefit.”

 

Consider the desperate search for revenues to pay for the Democrats’ government intrusion into private health care.  On March 27, Senate Majority Leader Harry Reid (D-NV) said he wanted to use cap-and-trade revenues for healthcare reform.   According to Bloomberg News: “Senate Majority Leader Harry Reid said he is open to financing an overhaul of the U.S. health-care system with revenue generated from efforts to rein in greenhouse gas emissions. Reid, a Nevada Democrat, told reporters yesterday Democrats are determined to finance the cost of any expansion of health care with savings found elsewhere in the government’s budget in order to avoid widening the federal deficit.  ‘I don’t think we should take anything off the table as to what we’re going to do with health care, what we’re going to do with this carbon that’s killing our country with global warming,’ said Reid.”

In your view, government imposing a mandate that forces consumers to pay more for something is not, in fact, a tax.  As you wrote, “Seidel said there's another problem with the blogger's report, as quoted by the senator: the Treasury documents report that $100 billion to $200 billion in revenue raised each year by selling those pollution permits we mentioned earlier. Alexander and McCullagh incorrectly portray them as taxes. There are legitimate questions that can be raised about how much the cost might ultimately be passed on to consumers, but it is not correct to refer to the revenue as a tax.”

This is, to put it charitably, ridiculous.  Consider the recent exchange between President Obama and George Stephanopoulos of ABC News.  Appearing on ABC's "This Week," Obama was asked by Stephanopoulos about Sen. Baucus’s “individual mandate” in the Senate health care bill.  The Senate bill, which Obama supports, requires everyone to buy health insurance or else pay a penalty as high as $3,800 a year.  Stephanopoulos asked that if "the government is forcing people to spend money, fining you if you don't [buy insurance]. . . . How is that not a tax?"

"Well, hold on a second, George," Obama said. "Here's what's happening. You and I are both paying $900, on average—our families—in higher premiums because of uncompensated care. Now what I've said is that if you can't afford health insurance, you certainly shouldn't be punished for that. That's just piling on. If, on the other hand, we're giving tax credits, we've set up an exchange, you are now part of a big pool, we've driven down the costs, we've done everything we can and you actually can afford health insurance, but you've just decided, you know what, I want to take my chances.  And then you get hit by a bus and you and I have to pay And then you get hit by a bus and you and I have to pay for the emergency room care, that's . . ."

"That may be," Mr. Stephanopoulos responded, "but it's still a tax increase."  Mr. Obama: "No. That's not true, George. The—for us to say that you've got to take a responsibility to get health insurance is absolutely not a tax increase. What it's saying is, is that we're not going to have other people carrying your burdens for you anymore . . ."

“I don't think I'm making it up," Stephanopoulos said.  He cited Merriam Webster’s dictionary definition of tax: "a charge, usually of money, imposed by authority on persons or property for public purposes."

This is exactly what cap-and-trade does.  It raises costs on consumers (remember: electricity prices will necessarily skyrocket), then the government redistributes their money, through various subsidies and payment schemes.  One hopes that one will remain whole at the end.  Yet one is inclined to ask: how many times has government taken money from citizens and then paid all of it back?  Cap-and-trade is a tax, plain and simple.  And no attempts to hide it, ameliorate it, or gloss over it change that. 

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