Carbon taxes, to be effective, will raise large amounts of money. That’s their job — to cut carbon dioxide emissions by decisively raising prices of fossil fuels. Part of our mission at CTC is to advocate for carbon taxation to be as "progressive" as possible, with the tax revenues used to protect the interests of middle-income and low-income Americans.

It is true that most middle- and low-income households spend a larger percentage of their income on gasoline than do wealthy households. (We discuss gasoline here because data are readily available and because gasoline tops most families’ energy budgets.) The top 20% of U.S. households spend just 2.3% of their after-tax income on gasoline; the percentage for the lowest "quintile," 9.1%, is four times as high. Clearly, imposing a gasoline tax or, by implication, a carbon tax, without tax-shifting or rebating, would have a disproportionate percentage impact on lower-income families.

But the picture is quite different when energy expenditures are viewed in absolute dollar terms — which we believe is a more meaningful measure. In 2005, the most recent year available, the upper-echelon quintile spent an average of $3,182 on gasoline, or 3.6 times as much as the $882 spent by the poorest 20% of households. Put differently, when all household outlays for gasoline are apportioned among quintiles, the highest-earning quintile accounted for 32% of the total, while the lowest quintile contributed just 9%. (The middle quintile, true to its name, spent exactly 20% of the total.)

What’s true for gasoline applies to energy in general. Wealthier households not only drive more, they also fly more (burning jet fuel), they have bigger (and sometimes multiple) houses to heat and cool (consuming heat and power), and they buy more stuff that requires electricity or industrial fuels to manufacture and use. This means that most carbon taxes will be paid, directly or indirectly, by families of above-average means. For the gasoline part of carbon taxes, we estimate that around two-thirds of the taxes will be paid by above-average-income households. (We calculated this by combining the first quintile’s share of gasoline expenditures, 31.6%, with the second quintile’s share, 25.0%, and one-half of the middle quintile’s share, 19.8%, which yielded 66.6%. All data here are from the Bureau of Labor Statistics’ Consumer Expenditure Survey, 2005.)

This progressive distribution of carbon tax revenues is what creates a basis for progressive tax-shifting: transferring a portion of the tax burden from regressive taxes such as the payroll tax (at the federal level), as Al Gore is urging, and the sales tax (at the state level) onto carbon emissions instead. Although we at CTC haven’t finished running the numbers — allocating carbon tax payments by corporations and government adds a twist to the analysis — we believe it is possible that one or both of these approaches may have a net progressive effect, i.e., that tax-shifting from payroll and/or sales taxes to carbon taxes will raise, not lower, the after-tax incomes of a majority of below-median-income households.

An alternative approach that is unquestionably progressive, as well as straightforward, is to rebate the carbon tax revenues equally to all U.S. residents. This would be a national version of the Alaska Permanent Fund, which once a year sends every resident of that state an identical check drawn from the state’s North Slope oil royalties. (For a federal carbon tax, the rebate checks should be provided at least quarterly to keep households ahead of the budget treadmill.) With carbon tax revenues rebated in this pro rata fashion, the vast majority of poorer households would get back more in the rebates than they would pay in the tax.

A numerical illustration may help to grasp the progressive impact of rebating carbon tax revenues equally to all U.S. residents. Here are the steps leading to this conclusion:

• We estimate that the revenues from Year 1 of our graduated "Starter Tax" of $37 per ton of carbon emitted would be approximately $55 billion a year. (The actual dollar amount isn’t critical for this example.)
• Assuming that this entire amount is rebated equally to all 300 million U.S. residents, each annual rebate would be $183.
• From our earlier observation that the lowest-income quintile makes 9% of gasoline expenditures, $4.8 billion of the carbon tax payments would be made by the 60 million people comprising this quintile. (Yes, we are using gasoline as a "proxy" for carbon fuels, for the reasons given earlier.)
• Averaged over those 60 million, each individual in the lowest-income group would spend an average of $80 a year in carbon taxes.
• Netting this $80 per-person carbon tax from the $183 per capita rebate, we see that the average person in the bottom quintile would gain approximately $100 in the first year of our $37/ton carbon tax. Annual installments to ramp up the tax rate would only add to the gains of this lowest-income group.

Using the same methodology, we calculate that carbon tax payments for the top quintile would average $290 per person per year. Since each person in this group would also receive a $183 rebate, we see that the average person in the top quintile would pay a net of a little over $100 in carbon taxes during the first year. The same result of the more affluent paying a net tax and the less affluent receiving a net gain applies to the second and fourth quintiles as well, though the magnitudes of the impacts are smaller. The middle group would experience no net change in after-tax income, on average.

We recognize that some individuals in the lower-income quintiles would be subject to higher than average carbon taxes because they have old fuel-guzzling cars, drive long distances to work, have old inefficient furnaces and/or live in poorly insulated homes. A portion of the carbon tax revenues could and should be used to help reduce the energy use of their cars and homes.

These observations are preliminary, and much more analytical work remains to be done, particularly on the tax-shifting alternative. But the principles are clear: tax rebating or shifting can ameliorate the disproportionate impact of carbon taxing, perhaps to the point that below-median households become net beneficiaries. CTC is committed to advocating for such an outcome, for both pragmatic and ethical considerations. Pragmatically, because the politics of a carbon tax require support from economic justice advocates; and ethically, because it’s not tenable to solve the climate crisis on the backs of those who can least afford it.