Washington to Vote on Nation’s First Carbon Tax

The Bloomberg BNA Tax Management Weekly State Tax Report filters through current state developments and analyzes those critical to multistate tax planning.

By Paul Shukovsky

Oct. 19 — Washington’s electorate will vote Nov. 8 on whether to impose a carbon emission tax on fossil fuels while simultaneously reducing both sales and business and occupation (B&O) taxes.

While other regimes exist to put a price on carbon, such as California’s cap and trade program, if Initiative 732 passes, it would be the first direct tax on carbon in the U.S. It’s intended to be revenue neutral, not only to make it palatable to business and the electorate, but also to avoid falling into the political morass over whether it would expand or contract government.

I-732 would slash the B&O tax on manufacturing almost to zero, and it would phase in a one percentage point cut in the state sales tax and implement a partial sales tax exemption for low-income families to address inherent regressivity—all paid for by a phased-in tax on carbon emissions.

The tax would be levied on the carbon content of fossil fuels sold or used in the state and on the carbon content of electricity consumed in Washington, including power imported into the state. The tax rate would begin July 1, 2017, at $15 per metric ton of carbon dioxide; jump to $25 per metric ton on July 1, 2018; and increase annually by 3.5 percent plus inflation with a cap of $100 per metric ton in 2016 dollars.

Like ‘War and Peace.’

The initiative would cut the sales tax from 6.5 percent to 6 percent on July 1, 2017, and to 5.5 percent on July 1, 2018. It also would cut the B&O tax—which is a gross receipts tax— on a wide spectrum of manufacturing from starting points of .484 percent to .138 percent, depending on the industry, to .001 percent.

Carbon tax on fuel used for agriculture, public transportation, the state ferry system and school buses would have an extended phase-in period, not reaching 100 percent of the full tax rate until 2055.

I-732 was inspired by the revenue neutral carbon tax in neighboring British Columbia, economist Yoram Bauman—founder and co-chair of the campaign to pass the carbon tax—told Bloomberg BNA Oct. 19. In addition to reducing emissions, the B.C. carbon tax has caused “per capita gasoline consumption to drop by seven percent and the fuel economy of the vehicle fleet to go up by four percent,” Bauman said, citing a recent paper by two University of British Columbia professors.

Asked why he chose to follow in British Columbia’s footsteps rather than California’s, Bauman said: “California’s cap and trade system is a little bit like War and Peace, which doesn’t necessarily mean it’s bad. ‘War and Peace’ is generally recognized as one of the best novels ever written—it is just complicated. The B.C. carbon tax took five months to implement. California’s cap and trade took something like six years.”

‘Haven’t Made Me Whole.’

Even though I-732 would provide a cut in B&O tax, it has met with opposition from the state’s business community, which complains that many manufacturers already have tax preferences giving them low B&O tax rates. That means the B&O rate reduction provided by I-732 wouldn’t offset the higher prices for gasoline, natural gas and electricity that the carbon tax would bring.

“While we certainly agree with the need to reform Washington tax code, the way they went about this isn’t taking into consideration the ongoing discussions we’ve already had in Olympia,” Brandon Housekeeper, government affairs director for environmental issues at the Association of Washington Business, told Bloomberg BNA Oct. 18. “Manufacturers have gone in and made their case that in order to stay competitive as energy-intensive, trade-exposed companies, they needed assistance with the B&O rates. So many manufacturers across the state—food processors, pulp and paper industry, aerospace and others—have already received B&O preferences.

“So while there are some minimal gains for manufacturers from that B&O reduction, the claim that it is going to balance or offset an increase in energy prices, it just simply isn’t true,” Housekeeper continued. “Industry is saying: ‘I get what you’re trying to do, but you haven’t helped me; you haven’t made me whole. You’ve just increased my costs,’ because B&O rates are already low for several manufacturers because they have been to Olympia and made their case that they needed relief.”

Housekeeper also points out the regressive nature of a tax that will raise the price of gasoline and electricity. “This is an energy tax increase not just to businesses, but to citizens of the state,” he said. “People will feel it at the pump, when they turn on their heat, when they turn on their lights at home.”

‘Not the Corner Grocery Store.’

Bauman says Housekeeper is simply ignoring the one percentage point drop in the sales tax rate along with the low-income family tax exemption that beginning in 2018 would refund the greater of $100 or 25 percent of the federal earned income tax credit to eligible taxpayers.

“This is a carbon tax where we are cutting the sales tax, which is an even more regressive tax,” Bauman said. “And we’re funding an income tax credit benefit for low-income households. We provide a billion dollars in the first six years to the working families rebate. This is a terrific, progressive policy.”

Bauman dismisses as a “red herring” the most frequently cited criticism of I-732: that rather than being revenue neutral, the carbon tax would mean a $797 million decrease in state general fund revenue over the first six fiscal years. That’s according to a fiscal impact statement produced by the state Office of Financial Management and the Department of Revenue. Bauman asserts that the OFM fiscal analysis is wrong and that I-732 is slightly revenue positive. The state model failed to include carbon tax revenue from exported electricity, applied the wrong tax rate to the spot power market and double counted the working families rebate, he said.

“The bottom line is that all of the analyses are well within the margin of error for these types of revenue forecasts—all within plus or minus one percent of state tax revenue,” Bauman said. “State tax revenue over six years is about $120 billion. We’re talking about a fraction of one percent. These are large numbers, and, as a percentage, this issue is a red herring.”

“The state takes in roughly $2 billion a month. It’s not the corner grocery store we’re talking about here,” said Bauman, who despite having a PhD in economic from the University of Washington, makes his living as a stand-up comedian riffing on the economy for corporate and collegiate audiences.

To contact the reporter on this story: Paul Shukovsky in Seattle at PShukovsky@bna.com

To contact the editor responsible for this story: Ryan C. Tuck at rtuck@bna.com

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