Eliminating Tax Expenditures with Adverse Environmental Impacts

By Eric Toder
Brookings Institute
Washington, DC (January 1, 2007)- Eliminating or scaling back tax expenditures that promote production and consumption of fossil fuels would reduce the budget deficit, promote economic efficiency, and be a step towards more environmentally friendly tax law. Tax expenditures are provisions in the U.S. federal tax code that provide special tax benefits for selected economic activities or taxpayers. A number of tax expenditures add to greenhouse gas emissions by encouraging production and consumption of fossil fuels.

This policy brief examines four tax expenditures listed by the Joint Committee on Taxation-each with an annual revenue loss of over $1 billion-that increase consumption of fossil fuels. The first three-expensing of exploration and development costs, percentage depletion, and the alternative fuel production credit-encourage domestic production of fossil fuels. The fourth-exemption of qualified parking expenses-encourages commuting by automobile.
Eliminating or scaling back these and other tax expenditures that promote production and consumption of fossil fuels would reduce the budget deficit, promote economic efficiency, and be a first step toward making the tax law more environmentally friendly. However, the effects of the proposed tax reforms on greenhouse gas emissions would be small-so addressing tax expenditures, while desirable for a number of reasons, can be only one part of a broader strategy to reduce climate change.
About the Green Fees Initiative
The federal tax code can have a significant impact on the environment. Fiscal policy is used to encourage as well as discourage various business activities and consumer decisions. These activities affect the environment and human health by influencing how much we consume, how we use natural resources, and how much pollution is released into our air and water.
The President’s recent call for tax reform and the presence of persistent budget deficits provide opportunities for policy makers to consider changes to the federal tax code that could lead to not only greater fiscal responsibility, but also improved human and environmental health.
The World Resources Institute’s Green Fees initiative seeks to identify and analyze a portfolio of tax reforms that would be both fiscally prudent and environmentally sound. WRI and partners will educate policymakers, interest groups, and opinion leaders in order to build support for these measures.
The portfolio of reforms WRI will address include:
* Eliminating existing tax expenditures that forego revenue and that encourage activities reducing the quality of our air, the cleanliness of our water, and the abundance of our natural resources;
* Introducing environmental charges on pollution and waste to discourage environmental degradation, stimulate technological innovation, and improve the federal budget situation.
For more information, visit the World Resources Institute.