Cyrus Reed, Texas Center for Policy Studies

If we plan to tax sins, why not tax pollution?

Thursday, April 22, 2004

In outlining his plans this month to finance public education in Texas -- and reduce property taxes -- Gov. Rick Perry proposed to raise taxes on "sins," including cigarettes, exotic dancing establishments and new gambling outlets.

While many have questioned the stability or appropriateness of paying for public education with "sin taxes," the governor might beef up his plan by looking at another sin often practiced in Texas -- pollution.

This week, state Rep. Lon Burnam, D-Fort Worth, announced that he will introduce legislation to raise revenue from pollution taxes to shore up the Available School Fund. Burnam's concepts are anything but "liberal." In fact, in recent years, free-market economists, policy-makers and environmentalists have called for a shift away from taxation on productivity, including both labor and business inputs, and toward resource extraction and pollution. Essentially, just as we tax cigarettes, alcohol and other sins to influence behavior and pay for the effects of that behavior, many economists believe we should tax pollution and natural resource exploitation.

Recently, Rice University economist Dr. George Zodrow, in outlining tax alternatives for schools to the state's Joint Select Committee on Public School Finance, called for expanding "benefit and environmental" taxes, including pollution taxes. Properly designed, pollution taxes efficiently tax the bad, not the good.

Just what would pollution taxes in Texas look like, and how much could they raise? While the number of possible taxes are limitless, the three introduced by Burnam this week are practical and efficient.

First, just as Texas taxes crude oil with a 4.6 percent severance tax and natural gas with a 7.5 percent severance tax, the state should finally tax coal. Just last fiscal year, the state raised $1.5 billion year from these two energy sources, while coal contributed no money to the general revenue. Texas is the country's largest user of coal, burning some 100,000 tons a year, chiefly at power plants. We are also the country's fifth largest producer of coal and are scheduled to open more coal mines in the near future.

But coal is a dirty fuel. About 85 percent of all air pollution from power plants comes from coal and lignite-burning power plants, directly contributing to smog in places such as Dallas, Houston, San Antonio, Austin and Longview. Mining and burning coal also is a direct contributor to the high amounts of mercury found in fish in many of Texas lakes.

A coal use tax of 7.5 percent could raise $135 million per year for Texas schools.

State leaders also should consider placing an "energy efficiency" tax on electricity producers. The higher the rate of smog-producing nitrogen oxide produced by electric power plants, the more tax they would pay. Those producing electricity more efficiently -- and with less pollution spewing over Texas skies -- would pay less.

How much would this increase Texans' electricity bills if passed onto consumers? An average of $1.30 per month on residential electrical bills. But through consumer choice, such as Austin Energy's GreenChoice Energy Program, residents could avoid the tax altogether.

Thus, under such a plan, the state would raise about $350 million per year for Texas schools while encouraging power producers and consumers to choose "green" power.

Finally, consumers buying clean-running cars could be offered a discounted motor vehicles sales tax, while those purchasing dirtier cars could be slapped with an added pollution sales tax of 1 percent or 2 percent. All new passenger cars, including pick-ups and SUVs, have been assigned a "bin" number by the EPA, which is directly related to tailpipe emissions. By tacking on an additional sales tax to the cars with the highest bins, the state could raise some $100 million per year.

Pollution taxes are not likely to be a long-term stable source of revenue for Texas' schools because they have the same problem as other sin taxes. If they work and discourage pollution, they raise less revenue. Thus, ultimately paying for our schools will likely require some other broader tax shift. But pollution taxes could raise significant revenue in the short term and send the right signals to consumers and producers to produce less pollution, which would make for healthier, more productive children in schools.

Reed directs the Texas Center for Policy Studies, a nonprofit research and policy organization in Austin.