Note to Obama: Tax Pollution and Energy Usage and Cut Payroll Taxes

President Obama was elected on a broad call for change. The new administration says it wants to give Americans a tax cut. The new President also says he wants to stop global warming and reduce our dependence on foreign oil. Here's a way to link all three objectives.

The largest tax paid by more than 80% of Americans, the regressive and job-killing payroll tax. Without structural change in our economy, our energy use, and our workforce the direction of our economy is heading in a dangerous direction. That direction, due to several strong trends,increasingly  is toward a perfect storm: 
     - First, the front end of the baby boom generation is begining to retire. By 2031 it’s estimated that there will be just 2.1 workers for every retiree.
     - Second, experts project world oil production will peak within a decade or two, with sharp, sustained increases in energy prices.
     -  Third, our dependency on foreign oil will continue to rise; by 2025, the Energy Department projects that we will import 70% of our oil, most of it from potentially unstable countries.
     -  Fourth, as concerns about global warming continue to mount, the U.S. may be forced to take draconian steps to reduce greenhouse gas emissions if we don't begin immediately to pay the true costs of our fossil fuel energy consumption.
     - Fifth, and perhaps most important, high labor costs in this country are contributing to the outsourcing of American jobs and the relocation of U.S. manufacturing to other countries.
As these trends converge, saddling our economy with rising budget deficits, crippling energy costs, a rapidly diminishing industrial base and a shrinking work force, structural change and integrated solutions are needed

What would help is fundamentally shifting the tax burden away from employment (which we need to increase dramatically)and toward unsustainable consumption of nonrenewable energy and other natural resources (which we will have to tighten). In other words, cut payroll taxes and substitute pollution and energy taxes. After decades of runaway payroll tax growth, we tax employment far too heavily. Seventy years ago, payroll taxes accounted for only 1% of federal revenues, but grew to 32% by 2000. Now they are 39% percent of federal revenues — almost as much as individual income taxes.

The payroll taxes are highly regressive—burdensome on low-income households. Iit does not apply to wages above $102,000 (for 2008). Worse, it’s a job killer. They inflate hiring costs, reducing job creation and take-home pay, and discourage marginal workers from working. Raising the maxiumum amount subject to payroll taxes, as Mr. Obama has suggested, might reduce their regressivity, but it will not address the other job-killing aspects of this tax.

Meanwhile, we continue to tax consumption of scarce natural resources, like oil, far too lightly. We should reverse those polarities by cutting payroll taxation and substituting higher taxes on the consumption of nonrenewable energy, like oil. That would lower the cost of labor, making U.S. workers more competitive and ultimately increasing the number of working, taxpaying Americans.

Leading labor economist Daniel Hamermesh estimates that a 10 percentage point drop in the payroll tax rate would boost employment by 3% in the short term and 10% in the long term. More workers would reduce projected budget deficits. A corresponding increase in taxes on consumption of oil and other fossil fuels would lower greenhouse gas emissions and boost renewable energy development, leading to leaner, greener industries adapted to the coming energy- and pollution-constrained world. It would also reduce dependence on foreign oil, making us less vulnerable to supply disruptions.

All this could be achieved without the heavy hand of government regulation or a net increase in taxes, simply by decreasing taxes on labor and increasing taxes on nonrenewable energy (and other scarce natural resources). That would create a tax revenue-neutral shift in price signals that now guide employers, workers and consumers. It would end distortion of market forces through undue taxes on employment, letting the market strike a more optimal balance between human and natural resources, hiring people vs. consuming things.

That would be truly fundamental reform. Support for this idea is growing among organized labor, business, policymakers and think tanks from the left and right alike. Bills which would do this have been introducted by Representatives Bob Indlish (R-SC) and John Larson (D-CT).  It’s time to  pay the true price of our resource and energy waste and stop distorting the economy with our undue tax burden on employment.

Robert Walker is the past president and June Taylor is a Director of Get America Working!  www.getamericaworking.org, an employment policy group