Washington Carbon Tax Bold but Flawed Proposal

October 26, 2016

Washington, DC (Oct. 26, 2016) – Initiative 732—which would impose a carbon tax on fossil fuel emissions—is an ambitious proposal, and in many respects a balanced tax plan. But it also carries significant risks, both in terms of revenue certainty and broader economic effects, according to a new report from the Tax Foundation.

Key Findings:

  • A state-specific carbon tax has the potential to induce “leakage” as manufacturers move operations to other states that do not impose such taxes. In these instances, the tax would neither raise revenue nor improve environmental outcomes.
  • Washington’s constitution requires that excise taxes from motor fuel sales are used exclusively for highway funding. Proponents of I-732 argue that the carbon tax on motor fuel is not an excise tax, but this interpretation is susceptible to legal challenges.
  • Carbon taxes are regressive, and the proposal would lower the sales tax and fund the working families tax credit to offset the impact on lower-income earners. Proponents claim the plan is revenue neutral, but it will likely lead to a revenue loss for the state in the short-term. As the carbon tax rate increases, the plan would become a net tax increase over time.
  • The average household would pay $225 more per year for gasoline under the proposal, and $64 more for electricity. They would also experience a rise in the cost of consumer goods.
  • A state-specific carbon tax faces unique challenges, a fact acknowledged by the economist who devised I-732. Proponents hope that other states will join Washington in adopting and harmonizing carbon tax policies to discourage leakage and reduce administrative and compliance costs.

“State taxation of carbon emissions is uncharted territory, and while I-732 was carefully crafted, any state choosing to go it alone on a carbon tax is taking a risk,” says report author Jared Walczak. “Proponents hope that other states will follow suit. Ultimately, the voters will have to decide whether such hopes are good enough.”

Click here for the full report.

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