As Congress confronts the impending expiration of the 2017 Tax Cuts and Jobs Act (TCJA) in 2026, the debate over how to manage the associated fiscal implications is heating up. Most individual income tax provisions of the TCJA are set to expire, and extending them would significantly increase the federal budget deficit. A potential solution is being proposed by experts who suggest that the introduction of a carbon tax could help offset the costs.
Extending the TCJA without adjustments would greatly reduce federal revenue. The Congressional Budget Office estimated that continuing the individual income and estate tax provisions alone would cost approximately $3.9 trillion between 2025 and 2034. Additional business tax provisions, such as bonus depreciation, could further raise the cost by $666 billion, leading to a total of $4.6 trillion in lost revenue and increased interest costs over the next decade.
Moreover, the cost estimates for extending the TCJA likely understate the true financial impact, as they do not account for provisions like the amortization of research and development costs or stricter interest deduction limits, which could add about $262 billion.
Given these fiscal challenges, a carbon tax offers a viable revenue alternative. This kind of tax, based on the carbon content of goods and services, seeks to price carbon emissions to reflect their negative externalities and incentivize reductions in emissions. The idea has been gaining traction as it can raise a significant amount of revenue. For example, a $35-per-ton carbon tax could potentially generate $95.2 billion in net revenue in 2024 alone, translating to about $1.26 trillion over a decade.
In addition to raising significant revenue, a carbon tax would also shift the tax base more towards consumption taxation, which generally has less distortionary effects on saving and investment decisions. An analysis by EY shows that using a carbon tax to fund the permanent extension of TCJA provisions could lead to a 2.1% increase in long-run GDP.
Furthermore, enacting a carbon tax could justify repealing the Inflation Reduction Act’s clean energy tax credits, which some lawmakers have targeted for repeal as part of a larger tax package. Repealing these credits could raise an estimated $795 billion over 10 years, aiding in offsetting the cost of a TCJA extension. The carbon tax would serve as a more efficient and effective measure to reduce emissions, rendering the clean energy credits redundant.
While there are challenges associated with implementing a carbon tax—especially its regressive nature, which could impact low-income households—these can be mitigated. Revenue from the carbon tax could be used to provide transfers to support these households, partially cushioning the impact.
With the TCJA provisions set to expire in just a few years, lawmakers face significant decisions. Extending these cuts without a plan to offset the costs would dramatically increase federal borrowing and have long-term economic consequences. As such, a carbon tax emerges as a fiscally responsible and environmentally sound option to help manage the costs associated with extending the TCJA.
For more detailed analysis, you can refer to the full article on Bloomberg Tax.