The governor and the leadership of the General Assembly have agreed to develop, by the end of January, a plan to address Maryland's fiscal crisis. Their task is not an easy one.
The challenge for the state's leaders is to develop a fiscal package which is economically responsible, socially just and politically achievable. If taxes are to be on the agenda, the state's leaders would do well to consider an additional objective -- promoting a healthy and sustainable environment.
One of several options affecting energy use identified by the General Assembly's Joint Study Group on Revenues is an air pollution tax on fossil fuel consumption. Such a tax can both provide environmental benefits and contribute to the resolution of the state's fiscal problems. This tax, also known as carbon tax, would be levied on fossil fuels at rates proportional to the carbon content of each fuel.
At the same time it will raise revenues, an air pollution tax will also reduce carbon dioxide emissions and conventional air pollution: by increasing fossil fuel prices, it encourages more efficient use of energy and stimulates development of renewable technologies; and by changing relative prices, it encourages a shift in consumption from coal and oil to cleaner-burning natural gas.
Another benefit of an air pollution tax will be its ability to help remedy Maryland's failure to comply with Clean Air Act requirements, which will subject the state to sanctions that include a cutoff of federal highway funds if air pollution is not reduced. It will also discourage the use of fuels that emit more carbon dioxide, the most important of the so-called "greenhouse gases" which are responsible for the threat of global warming.
If levied at a modest rate of $7.50 per ton of carbon, an air pollution tax would raise approximately $200 million annually. This would represent a tax of two-tenths of a cent per kilowatt hour on electricity, 1.2 cents per therm on natural gas, and about 2 cents per gallon on gasoline and fuel oil. At this rate, the tax would be lower than the energy taxes already levied by several counties and much lower than the existing state motor fuels tax. The tax would add approximately $50 to the average household's combined annual bill for residential energy and gasoline.
There are other proposals studied by the Joint Study Group on Revenues that address energy consumption. But most of them, such as a proposal to impose the state's 5 percent sales tax on consumption of residential fuels and electricity, fail to distinguish between clean and dirty fuels. Like the existing utility tax, these alternatives would tax clean renewable energy sources at the same rate as a dirty coal plant.
These alternatives would also not raise as much revenue as an air pollution tax. Compared with the $200 million raised by such a tax, the sales tax on energy would raise about $110 million, yet would add up to $20 more per year to the average household energy bill than the air pollution tax.
The air pollution tax has a broader base than any of the alternatives because it would be imposed on all fossil fuels and across all sectors of the economy.
Even though it spreads the tax burden more evenly, an air pollution tax, like other taxes on energy, is regressive. To mitigate this effect, residential utility bills up to a specified "baseline" amount could be exempted from the tax, or revenues could be used to finance tax credits or weatherization programs for low-income households. Although the effect on coal prices is small, some of the revenues from the tax could also be earmarked for economic adjustment programs in coal-producing areas which already face change as a result of the recent federal Clean Air Act amendments.
A common argument against a pollution tax is that it will hurt business. But at a rate of $7.50 per ton of carbon, the tax is low enough to have a minimum effect on the competitiveness of Maryland business, which is generally taxed at a lower rate than in surrounding states. More importantly, however, the relevant question is not how the tax looks on its own, but how it compares with the alternative fiscal measures available. Sales taxes, property taxes and cutbacks in education or infrastructure development can all damage the state's economic competitiveness.
In a recent survey of Maryland residents, conducted for the Environmental Leadership Forum, 70% of respondents agreed with the statement: "If it costs more to protect the environment, we should be willing to pay the burden, even if it means some inconvenience and/or more taxes, user fees or higher retail prices." Many Marylanders have shown their support for this idea by paying additional fees for the "Treasure the Chesapeake" license plate.
The concern of Maryland residents for the environment is justifiable. With its vast Chesapeake Bay coastline, Maryland stands to lose more than most states in the event of rapid global warming. And since Baltimore is the fourth dirtiest city in the nation for smog, the state will benefit from a redirection of energy investments toward cleaner technologies. An air pollution tax will help address these serious concerns at the same time it contributes to solving the state's critical financial problems.
Frank Muller is senior policy analyst at the Center for Global Change at the University of Maryland College Park.