Environmental Tax Policy in the United States: Alternatives to the Polluter Pays Principle

Environmental taxation is becoming widely accepted as a policy tool for promoting environmental goals. The “polluter pays principle,” whereby taxes and fees are charged for polluting behaviours, dominates environmental tax policy in several European countries, including Sweden and the Netherlands (see OECD 1994). However, these so-called “green taxes” are not the only available tool in the tax system. Tax subsidies, including income tax credits and property tax exemptions, are also viable options for creating incentives to meet environmental goals. Although the use of subsidies appears to be relatively rare internationally (compared to the use of green taxes), they have been used occasionally at the federal level in the United States and are used quite regularly at the state level, where taxing authority is independent of the federal government. This paper will explore justifications for the use of environmental tax subsidies. Examples of programs in the United States will be given as guidance to the discussion in the paper. Ultimately, this research may bring new policy ideas to the forefront in the movement to clean up the earth's environment.