Despite the theoretical advantage of environmental taxes,[i] they are far away from becoming a major environmental policy in the US.[ii] This gap between theory and practice is more significant in the context of climate change issues. Though more than ten carbon tax proposals have been put forward in the Congress, none of them has become law.[iii] In light of the stalled situation, transferring focus from direct congressional lawmaking to delegated lawmaking by agencies may provide a new perspective for the current discussion of carbon tax legislation, either politically or economically.
Tax is generally less delegable than other legal areas in the US. The most likely constitutional ground on which tax delegations might be challenged is the so-called non-delegation doctrine. While the non-delegation doctrine is widely deemed as dead, its application to tax delegations is unsettled.[iv] In practice, the Congress generally delegates less broadly in the tax area than in other legal areas. Congress delegates the EPA broad regulatory authority to promulgate substantive rules that can have enormous effects on incentives and distribution. In a comparison, Congress rarely enacts tax statutes that provide for general tax policy principles, granting agencies the discretion in determining tax rates. The tax statutes normally only allow the agencies to elaborate the definitions of tax bases and formulate enforcement rules. [v]
This general tax/regulation distinction for delegation purpose is facing new challenges in the case of environmental taxes. Scholars have recognized the distinction of regulatory taxes from fiscal taxes.[vi] Environmental taxes are regulatory taxes by nature. The primary objective of a carbon tax, for instance, is not to raise revenues, but to reduce carbon emissions and thus curb climate change. Due to such distinguished feature, the emergence of environmental taxes, or “regulatory taxes” in general, has blurred the border between taxes and regulations. If the Congress delegates the EPA to decide on the rates of environmental taxes “requisite to achieve certain goals for environmental protection”, which have already been set by laws or rules, does the regulatory nature of environmental taxes justifies more delegation than the current case of tax delegation?
The most common argument against delegation of tax rates is the concern over the control of property deprivation and distributional consequences.[vii] Opponents of tax delegations, deeming taxation as the most prominent and extensive intrusion of the State’s power into the sphere of the individual, argue that the democratic nature of the legislative process is necessary for imposition of taxes.[viii] In addition, some scholars view the distribution of tax burdens to be a quintessentially political decision entailing tradeoffs among different groups of taxpayers.[ix] In the US, many scholars believe the interests of taxpayers are best represented and given voice in the rough-and-tumble of the tax legislative process in Congress.[x]
This distributional concern is less justified in the case of environmental taxes, considering their regulatory nature. First, the Congress has frequently delegated regulatory powers that have similar distributional consequences to agencies in practice. For instance, rules enacted by the EPA, such as pollution discharge standards, similarly affect the distribution of benefits and burdens of environmental protection.[xi] Second, tax rates, bases, and preferential measures of environmental taxes together determine tax burdens. Regulatory power to set up tax base definitions and tax preferential measures, which the executive branch routinely undertakes, automatically carry implications for the distribution of tax burdens. Taxing a new pollutant is likely to reduce the generation and discharge of many other pollutants emitted from the same source at the same time. In light of this fact, having the rate-adjustment power is necessary for avoidance of excessive tax burdens on polluters without undermining the realization of regulatory goals.
The demand for legislative action is also less valid in the case of environmental taxes. First, the transaction costs of congressional lawmaking process may impede actions addressing polycentric issues like climate change.[xii] Even if the public agree on the necessity of carbon pricing, Congress may still be unwilling to act due to the voting circle.[xiii] In comparison, agency’s rulemaking process faces less transaction costs. Second, if the tax rates determined by the EPA contradict the legislature’s intent, Congress could correct the EPA’s rule through various control measures, including statutory control, oversight, appropriations, and confirmation of nominees.[xiv] Citizens could in turn hold the Congress accountable through election, and no evidence shows that holding Congress accountable for delegated power faces special difficulty in comparison to holding Congress accountable for direct lawmaking.[xv] Third, public participation in administrative rulemaking, checked by judicial review, could be more accessible due to lower participation costs, more meaningful of concretized issues and available facts, and more effective in the policy implementation setting.[xvi]
In addition to the weakened distributional and democracy concerns, delegation of environmental taxes can promote welfare by better addressing environmental issues. To begin with, the EPA has the advantage of expertise over the Congress. Environmental policymaking, due to the complex and dynamic nature of the ecological injuries, often requires highly technical and scientific understanding of the matter to be regulated.[xvii] Environmental agencies have comparative advantages, in terms of expertise and time, with respect to these aspects of environmental governance.
In addition to expertise needs, regulating environmental issues also demands flexibility, which could be better provided by agencies than legislatures. In the case of a carbon tax, there is both uncertainty as to the social cost of carbon and the cost of abating carbon emissions.[xviii] New information is likely to arise constantly with the ever-progressing scientific understanding of and technological solution for climate change.[xix] If later adjustments to a carbon pricing system were left entirely to legislatures under normal legislative process, legislatures would fail to act as new information is received. That could lead to significant costs as the price of carbon could be either too high or too low based on the latest information.[xx]
Finally, delegation is necessary for coordinating different environmental policy instruments to effectively achieve a common goal.[xxi] Given a pre-determined goal of pollution reduction, the strictness of other environmental regulations, such as the pollutant discharge standards, will directly impact the regulatory demand for environmental taxes. As the power to formulate pollutant discharge standards has already been widely delegated to environmental agencies, environmental taxes rates should also be delegated more to agencies. Though legislatures may play the role as coordinators, they are inefficient due to the lack of expertise and flexibility as set forth above.
In sum, the regulatory nature of environmental taxes weakens the distributional concern and decreases the demand for congressional democracy, and thus justifies the legitimacy of environmental tax delegation. Furthermore, delegating the power to enact environmental taxes is also likely to promote welfare thanks to agencies’ comparative advantages in expertise, flexibility, and coordination of environmental policy instruments. Therefore, Congress should have the option of delegation in enacting environmental taxes.
*Kaijie Wu is a Junior Editor on MJEAL. She can be contacted at firstname.lastname@example.org.
The views and opinions expressed in this blog are those of the authors only and do not reflect the official policy or position of the Michigan Journal of Environmental and Administrative Law or the University of Michigan.
[i] For a comprehensive discussion of theory of environmental taxes, see Janet E. Milne, Environmental Taxation: Why Theory Matters, Critical Issues in Environment Taxation 3–26 (Janet E. Milne et al. eds., 2003).
[ii] See Jonathan S. Masur & Eric Posner, Toward a Pigouvian State, 164 U. Pa. L. Rev. 93, 96 (2015-2016) (noting that very few references to Arthur Pigou or Pigouvian taxes could be found in the entire history of the Congressional Record).
[iii] See Carbon Tax Center, Bills, Carbon Tax Center https://www.carbontax.org/bills/ (last visited March 5, 2019) (providing a summary of carbon tax bills brought before Congress).
[iv] The Court has occasionally suggested that tax is different but the conventional wisdom seems to be that Congress has just as much freedom to delegate tax lawmaking power as it has to delegate any sort of lawmaking power. See James R. Hines Jr. & Kyle D. Logue, Delegating Tax, 114 Mich. L. Rev. 235, 268 (2015-2016).
[v] Id. at 248.
[vi] For discussions on regulatory taxes and its distinction from fiscal taxes, see Reuven S. Avi-Yonah, Taxation as Regulation: Carbon Tax, Health Care Tax, Bank Tax and Other Regulatory Taxes, Acct. Econ. & L. no. 1, Article 6, at 2 (2011); Reuven S. Avi-Yonah, The Three Goals of Taxation, 60 Tax L. Rev. 1 (2007) (identifying that taxation with regulatory goals is called regulatory tax, or taxation as regulation).
[vii] See Hines Jr. & Logue, supra note 4, at 257.
[viii] See Wolfgang Schön, Taxation and Democracy, Max Planck Institute for Tax Law and Public Finance Working Paper 2018-13, 4-7 (2018).
[ix] See Hines Jr. & Logue, supra note 4, at 257.
[x]ˆ at 257.
[xi] For a survey of the ways in which environmental regulation can have distributional consequences, see Richard J. Lazarus, Pursuing “Environmental Justice”: The Distributional Effects of Environmental Protection, 87 Nw. U. L. Rev. 787 (1993).
[xii] See Richard J. Jr. Pierce, Political Accountability and Delegated Power: A Response to Professor Lowi, 36 Am. U. L. Rev. 391, 404 (1987).
[xiii] See Jerry L. Mashaw, Prodelegation: Why Administrators Should make Political Decisions,1 J. L, Econ., & Organization 81, 98 (1985) (citing voting theorists’ statement that “whenever three or more alternative policies exist there is the ever present possibility of a voting cycle which can be broken only by resort to some form of ‘dictatorship’ result”).
[xiv] See Peter H. Schuck, Delegation and Democracy: Comments on David Schoenbrod, 20 Cardozo L. Rev. 775, 784 (1999).
[xv] See Eric A. Posner & Adrian Vermeule, Interring the Nondelegation Doctrine, 69 U. Chi. L. Rev. 1721, 1753 (2002).
[xvi] See Schuck, supra note 13, at 782.
[xvii] See Richard J. Lazarus, The Making of Environmental Law 6 (2008).
[xviii] On the uncertainty of the social cost of carbon, see David Anthoff & Richard S. J. Tol, The Uncertainty About the Social Cost of Carbon: A Decomposition Analysis Using Fund, 117 Climatic Change 515 (2013). On the uncertainty of the cost of abating carbon emissions, see Carolyn Fischer & Richard D. Morgenstern, Carbon Abatement Costs: Why the Wide Range of Estimates?, 27 Energy J. 73 (2005).
[xix] See Gillbert E. Metcalf & David Weisbach, The Design of a Carbon Tax, 33 Harv. Envtl. L. Rev. 499, 519 (2009).
[xx] For a discussion of the challenge of uncertainty in setting the price of carbon as well as other environmental policies, see generally Robert S. Pindyck, Uncertainty in Environmental Economics, 1 Rev. Envtl. Econ. & Policy 45 (2007).
[xxi] See OECD, Instrument Mixes for Environmental Policy 17 (2007).