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Executive summary

A federal carbon tax in the United States would reduce greenhouse gas emissions and generate significant new revenue for the federal government. In this study, part of the Carbon Tax Research Initiative led by Columbia University’s SIPA Center on Global Energy Policy (CGEP), the Urban-Brookings Tax Policy Center (TPC) estimates the effects of various potential carbon taxes on the tax burdens of US households across the income distribution.

In a separate study, the Rhodium Group (RHG) uses its version of the National Energy Modeling System to estimate the effects of the same carbon taxes on energy market outcomes, including the prices of consumer goods. The outputs of the RHG analysis are inputs to this study, which uses Urban-Brookings Tax Policy Center’s large-scale microsimulation model to distribute the burden of a carbon tax across US households of different income levels.

We consider three carbon tax scenarios that would price carbon at roughly $14, $50, and $73 per metric ton starting in 2020 and increasing thereafter between 1 and 3 percent per year. A carbon tax at those rates would raise a significant amount of federal revenue, ranging from $740 billion ($14/ton scenario) to $3 trillion ($73/ton scenario) over a 10-year period. We consider four options for the use of this revenue: reducing the federal deficit, reducing payroll taxes, reducing the corporate income tax, and providing per capita household rebates.

Depending on how the revenue is used, a carbon tax policy can have dramatically different effects on the distribution of tax burdens. When revenue is used to reduce the deficit, a carbon tax is moderately regressive—that is, it increases taxes by a larger percentage of income for lower-income households than for higher-income households. Using revenue to reduce the corporate income tax (beyond the corporate tax cut in the recent Tax Cuts and Jobs Act) would result in higher taxes for low-income families and disproportionate benefits for higher-income taxpayers. Using revenue to provide lump-sum rebates would more than o set the carbon tax burden for low- and middle-income taxpayers but leave high-income families with a net tax increase. Using carbon tax revenues to reduce employee payroll taxes would result in a net bene t for upper middle-income taxpayers, while increasing tax burdens modestly for low-income and the highest-income households.

Our study is the first of which we are aware to estimate the distributional implications of a carbon tax since the passage of the Tax Cuts and Jobs Act of 2017. Our results are consistent with the findings of previous similar studies that have showed an overall carbon tax policy can be progressive, regressive, or neither, depending on how the revenue is used.