Extras on Excise: Washington Sends Carbon Pollution Tax to Legislature

carbon tax

Washington State Initiative 732 received enough voter signatures for Secretary of State, Kim Wyman, to send the initiative to the Legislature. The initiative would impose a carbon-emission tax intended to encourage sustainable economic growth. The Legislature now has the option of passing the initiative as is, or putting the initiative and a modified initiative in the state ballot in the fall. 

Included within the initiative is a phased-in carbon pollution tax on fossil fuels sold or used in Washington, which is intended to fund a phased-in reduction of the sales tax, a reduction of the business and occupation tax on manufacturing, and a change in the sales tax exemption for qualified low-income individuals. 

The carbon tax would begin July 1, 2017 at a rate of $15 per metric ton of carbon dioxide, and increase on July 1, 2018 to $25 per metric ton. After that, the tax would increase annually on July 1st by 3.5 percent (adjusted for inflation), but not to exceed $100 per metric ton based on the historic value of currency in 2016. There can be a tax refund or reduction if the taxpayer can demonstrate that although it uses fossil fuels, their specific use does not contribute to the atmospheric carbon dioxide concentration. 

The business and occupation tax on manufacturing would be reduced from a range of different rates (0.484 percent to 0.138 percent) depending on the industry to 0.001 percent. 

The sales tax on retail sales will change from 6.5 percent to 6.0 percent on July 1, 2017, and decrease to 5.5 percent on July 1, 2018. 

The working families’ tax exemption currently allows an exemption for the greater of 5 percent of the credit claimed under I.R.C. § 32, or $25. The initiative would allow an individual in 2017 an exemption for the prior year of the greater of 15 percent of the credit claimed or $100. In 2018 and thereafter, the claimed exemption for the prior year would be the greater of 25 percent of the credit claimed or $100.

The U.S. does not have a nationwide carbon tax, and Washington would be the first state in the U.S. to pass one if the initiative goes through. Though, Washington may have to race to the finish line because Massachusetts is also in the process of attempting to pass a carbon tax. Senate Bill 1747 is currently in the Legislature, proposing a revenue-neutral carbon fee. The initial fee would be $10 per ton of carbon dioxide and increase by $5 per year until a cap of $40 is reached. 

Continue the discussion on Bloomberg BNA’s State Tax Group on LinkedIn: Does the Carbon Pollution Tax have merit to pass in the Legislature, or will it meet obstacles based on the initiative’s strategy.

For more information about this and other state tax issues, sign up for a free trial of the Bloomberg BNA Premier State Tax Library.