Optimizing Tax Strategies to Reduce Greenhouse Gases Without Curtailing Growth

Increasing federal gasoline taxes is one of the policy options available for reducing gasoline consumption and the resulting carbon dioxide (CO2) emissions that contribute to global warming. At the request of the U.S. Environmental Protection Agency (EPA), DRI/McGraw-Hill (DRI) estimated the levels of gasoline tax that would be necessary to stabilize CO2 emissions from the light-vehicle fleet over a 20-year period, and the economic impacts of such a tax. Three options for utilizing the revenues generated are examined: a reduction of the federal budget deficit, a reduction in personal and corporate income taxes, and a reduction in the employer-paid portion of payroll taxes. Each option would yield markedly different levels of economic performance: while the first two options would result in reductions in economic growth, the third option (a reduction in the employer-paid portion of payroll taxes) would result in relatively slight negative economic impacts in the short term and positive economic impacts in the long term.