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Camp-CBO Exchange on Cap-and-Tax Proposal

March 26, 2009

Q: Higher energy prices? Yes.
Q: Any goods not rise in price? Unlikely.
Q: Drag on economy that reduces income and payroll receipts by 25%? Yes.

Washington D.C. – The Ways & Means Committee held a hearing today on addressing price volatility in climate change legislation.  Ranking Member Dave Camp (R-MI) and Congressional Budget Office (CBO) Director Dr. Douglas Elmendorf engaged in an exchange on the effects higher energy prices could have on American households and businesses. A transcript of Mr. Camp’s questions and Dr. Elmendorf’s answers is below:

REP CAMP: Would a climate change policy that places a price on carbon— would that mean higher energy prices across the entire economy?

CBO DIRECTOR ELMENDORF: Yes. I don’t know what you mean by the short run, but at any point in which we are putting a price on carbon emissions, that would be passed through to the cost that consumers face on energy products but also all other products that are made using fossil fuels.

REP CAMP:  Thank you.  Are there any goods and services that would not rise in price in response to that policy?

CBO DIRECTOR ELMENDORF: I don’t know if there are any goods that use no energy in their production.  It seems to me unlikely.

REP CAMP: When CBO estimates the impact of imposing say a cap-and-tax system on the economy, isn’t it true that when CBO scores those proposals, that it assumes the increases on energy taxes act as a drag on the economy and thereby reduce other income and payroll receipts?

CBO DIRECTOR ELMENDORF: Yes. An indirect tax—sales taxes, all sorts of other indirect taxes- and the carbon tax- so the price of cap-and-trade allowances would fit in that category.  That kind of revenue would then reduce the income that people have and the taxes they pay to the government.

REP CAMP: Isn’t it also correct to say the amount of this offsetting loss and other revenues depends on the design of this specific policy?  The CBO in January noted that traditionally there is a 25% offset.  Meaning that for every dollar of revenue generated by cap-and-tax, other tax receipts fall by 25 cents?