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Sustainability 2012, 4(6), 1329-1353; doi:10.3390/su4061329

Are Green Taxes a Good Way to Help Solve State Budget Deficits?

Department of Economics, University of Connecticut, Box U-63, Storrs, CT 06269, USA
* Author to whom correspondence should be addressed.
Received: 8 May 2012 / Revised: 31 May 2012 / Accepted: 7 June 2012 / Published: 18 June 2012
(This article belongs to the Special Issue Environmental and Resource Economics)
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States are increasingly turning to environmental taxes as a means of raising revenue. These taxes are often thought to generate a double dividend: an environmental dividend stemming from the environmental improvement, and an economic dividend resulting from use of the revenue from environmental taxes to reduce other distortionary taxes (e.g., income or sales taxes). We review the economic literature on the double-dividend hypothesis, and show explicitly that the conditions under which the second dividend exists are less likely to hold when the amount of revenue that would be raised by an optimal environmental tax is small relative to the tax revenue from other taxes. We then present estimates of the potential revenue that could be raised from two environmental taxes in Connecticut. The results suggest that, because of their small tax base, environmental taxes are likely to have limited potential to raise revenue to finance state government budget deficits and/or reduce other distortionary taxes. Overall, environmental taxes could still generate significant gains for society if they lead to significant improvements in environmental quality. However, without more evidence of the existence of a double dividend, states should not try to justify these taxes on the basis of raising revenue more efficiently.
Keywords: environmental taxes; double dividend; revenue raising; budget deficits; tax base environmental taxes; double dividend; revenue raising; budget deficits; tax base
This is an open access article distributed under the Creative Commons Attribution License (CC BY) which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.

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Zhou, R.; Segerson, K. Are Green Taxes a Good Way to Help Solve State Budget Deficits? Sustainability 2012, 4, 1329-1353.

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