Environmental tax shifting (ETS) is an approach to tax policy that

would:

• use the tax system to encourage environmental protection and discourage environmental degradation.
• continue to raise revenue adequate to meet public needs.
• reduce other taxes -- on labor, income or investment, for example – that would stimulate the economy

Simply put, ETS entails taxing "bads" while reducing taxes on "goods," thereby improving both environmental protection and economic performance.

For example, by imposing taxes proportional to pollutant emissions, government would send a price signal to polluters and to purchasers of their products. This approach makes polluting more costly and investing in alternative technologies, practices and resources less costly, thereby inducing actions that reduce emissions, improve air and water quality, protect natural environments, and enhance public health. The "tax shift" is achieved by

a parallel reduction in some other tax, a reduction that may stimulate beneficial economic activity.

Currently, there are many wrong or weak signals in our tax system that could be candidates for tax shifting. For example, pesticides and fertilizers are exempt from sales taxes. These substances can pose serious health risks and significantly degrade water quality when they wash off into our rivers and streams. Elimination of some highway tolls sends a signal to commuters to drive rather than to use available transit options. The recently passed utility restructuring legislation has no incentives for customers to choose less polluting or renewable energy sources. Without such incentives, suppliers and customers will most likely choose the cheapest energy source, which could also be the most polluting, (e.g., coal). Tax shifting could address many of these concerns.

A revenue surplus of historic proportions. A strong economy has produced a surplus of over half a billion dollars in the state’s operating budget. Political leaders are much more likely to be receptive to proposals to significantly reform our tax system now than in leaner times when tax increases or spending cuts are the only available options.

Limitations on local property taxation. Nearly two decades ago, Massachusetts voters adopted Proposition 2 ½, which limited local property tax rates to 2 ½% of the assessed value of real estate. Some communities have "maxed out" their taxing capacity and would welcome new sources of revenue, while some communities could offer property tax relief if they had alternative revenue streams.

Increasing interest in ETS specifically. Environmental policies – such as permitting programs, technology requirements, inspection and enforcement systems – led to dramatic improvements in our environmental quality and reductions in pollution emissions. But for certain environmental concerns, these policies have little impact. For this next generation of environmental issues, we need to investigate new tools and approaches. Environmental groups in the state are increasingly recognizing the applicability of an ETS analysis to a wide range of topics. Most of the key environmental issues facing the state, from sprawl to air pollution to chemical use reduction could be addressed favorably by various tax shifts.

b Institute a feebate program that places a fee on purchases of inefficient vehicles and a rebate for purchases of efficient vehicles. The fastest growing sector of the motor vehicle industry is sports utility vehicles, vans, minivans and pickup trucks. These types of vehicles generally get fewer miles to the gallon and are not covered by the same emissions standards as automobiles. Light trucks also are exempt from a federal gas guzzler tax. A feebate program would send a signal to consumers about the full costs of driving and also encourage automobile manufacturers to increase the efficiency level of their vehicles.

b Encourage recycling and reuse and discourage manufacture of disposable items by introducing higher taxes on the solid waste we generate. Solid waste disposal can contaminate groundwater and surface waters and use up valuable land. High taxes on waste disposal would encourage innovation and thrift as individuals and businesses found ways to reduce their own waste.

b To discourage pesticide and fertilizer use, tax these substances while at the same time providing financial subsidies and technical assistance to help farmers move toward low-impact and organic farming. Currently, Massachusetts exempts all pesticides and fertilizers from the 5% sales tax. Since pesticide and fertilizer use contributes to water quality degradation, the costs of pollution should be included in the price of these products. Pesticide and fertilizer taxes can be assessed in a variety of ways including as a percentage of wholesale or retail sales price, or as a per pound tax on nitrogen content of fertilizers and on the active ingredients in pesticides.

If you are interested in learning more about environmental tax shifting, please contact Nancy Goodman at the Environmental League of Massachusetts, 617-742-2553 or Rachel Cleetus at the Tellus Institute, 617-266-5400.