Achieving these goals sounds hopeless, but it is not. A little creativity in tax policy could go a long way. Many countries, for example, impose taxes on environmental pollution. Such taxes have the potential to make taxes simpler and fairer, and to significantly reduce the budget deficit. What’s more, they would lead to a healthier environment and might even make for better U.S. foreign policy, too.

Current tax laws not only miss huge opportunities to clean up the environment, they also actively lead to worse ecological outcomes. The first step should be to remove subsidies that damage the environment. Federal rules provide enormous tax preferences for oil, mining, timber and sport utility vehicles. These subsidies create incentives for overproduction of these goods, and they stifle incentives for development of better or cleaner technologies.

Even the mortgage interest deduction is at fault–it may encourage people to build larger primary residences. The deduction also applies to second homes, many of which are built in environmentally sensitive areas. A thorough cleaning of the tax code, with an eye toward environmentally damaging subsidies, could generate billions of dollars a year in added revenue.

Easy Being Green
We can be more ambitious still. When people or firms create pollution, they are imposing costs on others. In economics, it is well established that those agents should pay the full costs of their activities. One way to do this is to require polluters to pay taxes on their emissions.

Pollution taxes can be more effective and flexible than many forms of regulation because they give incentives to improve efficiency and environmental quality. They also allow firms to make cost-effective emission reductions where it makes economic sense–or to pay the tax if not. These taxes also stimulate innovation for better pollution control methods.

A broad tax on the carbon content of fossil fuels, for example, would make those who produce or consume products that contribute to global warming face the full costs of their actions and give them incentives to reduce those costs. The money generated could be used for some combination of simplifying and reducing other taxes, paying down the deficit and financing appropriate spending. An important benefit would be reducing our dependence on foreign oil–and the political problems that creates–by encouraging the development of cleaner technologies.

Of course, new taxes are hardly politically popular. Yet, a number of common objections to environmental taxes can be addressed. In a poll conducted by three prestigious academic researchers–Princeton’s Alan Krueger, Stanford’s Victor Fuchs and MIT’s James Poterba–a majority of economists supported higher gasoline taxes. Moreover, Gregory Mankiw, former chair of the Council of Economic Advisers under President Bush, advocated higher gasoline taxes before joining the administration.

Some will argue that green taxes would be economically disruptive and could hurt U.S. competitiveness. However, the facts tell a different story. A carbon tax that raised $40 billion a year would raise gasoline prices by less than 10 cents per gallon. As for the issue of competitiveness, Tufts professor Gilbert Metcalf proposes that because the U.S. levies much lower green taxes than other industrial nations, it could raise such taxes without putting our businesses at undue disadvantage. Environmental taxes can be regressive, but they can be combined with other tax changes to make the net effect more progressive.

It would be foolish to ignore a set of revenue options with all of these benefits, but that is exactly what policymakers are doing. The president’s tax reform panel, for example, looked only at consumption- and income-tax options. An environmental tax that simplified existing taxes, reduced the deficit and financed new spending would benefit both the economy and the environment. These days, we no longer have the option of passing up such viable choices.

William G. Gale is a senior fellow at the Brookings Institution and codirector of the Urban-Brookings Tax Policy Center.