Are Green Taxes a Good Way to Help Solve State Budget Deficits?

Abstract

Abstract:States are increasingly turning to environmental taxes as a means of raising revenue. These taxes are often thought to generate a double dividend: an environmental dividend stemming from the environmental improvement, and an economic dividend resulting from use of the revenue from environmental taxes to reduce other distortionary taxes (e.g., income or sales taxes). We review the economic literature on the double-dividend hypothesis, and show explicitly that the conditions under which the second dividend exists are less likely to hold when the amount of revenue that would be raised by an optimal environmental tax is small relative to the tax revenue from other taxes. We then present estimates of the potential revenue that could be raised from two environmental taxes in Connecticut. The results suggest that, because of their small tax base, environmental taxes are likely to have limited potential to raise revenue to finance state government budget deficits and/or reduce other distortionary taxes. Overall, environmental taxes could still generate significant gains for society if they lead to significant improvements in environmental quality. However, without more evidence of the existence of a double dividend, states should not try to justify these taxes on the basis of raising revenue more efficiently.

Second-best pollution taxes: revisited and revised

“…Their role is simply subsumed by the role of the public preferences for taxpayers. Nevertheless, Zhou and Segerson (2012) have recently argued that given the small tax base, environmental taxes are not likely to be very successful in raising revenues and therefore the magnitude of the ''second dividend'' may be negligible.…”

Water taxation and the double dividend hypothesis

“…Several arguments have been put forward in relation to the use as well as benefits and costs of environmental policy in several countries [see Goulder (1995); Brouwer et al (2008); Tol et al (2008); Zhou and Segerson (2012) and Katri (2012)]. However, the potential for the existence of dividends cannot be taken for granted.…”

“…In fact, such tax reforms have been proposed and implemented in several countries [Letsoalo et al (2007); Patuelli et al (2005)]. However, some economists have been more skeptical about the potential gains from such interventions and as a consequence, the issue has become a subject of extensive research [see Schöb (2009); Zhou and Segerson (2012)].…”

“…Under certain circumstances, it can boost economic welfare [Goulder (1995) in Rausch and Reilly (2012)]. Howoever, Zhou and Segerson (2012) demonstrate that depending on the size of the tax base, environmental taxes may be efficient instruments for improving environmental quality, but not necessarily a better way to raise revenue.…”

“…The literature highlights the fact that whereas a strong double dividend is possible, it not may not always be guaranteed. In fact, it depends on a number of factors which among others, include the existing tax rates, elasticities as well as the level of inefficiency of the tax system [see Goulder (1995); Van Heerden et al (2006); Bento and Jacobsen (2007); Zhou and Segerson (2012) and Katri (2012)]. In the case of an environmental tax that targets water as a factor of production, substitution elasticities between factors are critical.…”