Washington Voters to Consider a Carbon Tax—Again

September 13, 2018

In Washington state, carbon taxation is the idea that’s not going away. After a purportedly revenue-neutral carbon tax was defeated decisively at the polls in 2016, and the governor’s revenue-positive proposal went nowhere in 2017, voters get another look at the idea when they vote this November.

That a revenue-neutral (or possibly even revenue-negative) carbon tax barely cracked 40 percent on the ballot two years ago probably does not bode well for the latest iteration, an initiated statute called the Carbon Emissions Fee Measure (Initiative 1631). Though called a fee, it would function as a tax, imposed at a rate of $15 per metric ton of carbon emissions from large emitters, largely defined as utilities and sellers of fossil fuels.

(Washington state designates levies as fees if their revenue is dedicated to specific funds. This does not accord with the traditional definition of the term, and by objective standards, I-1631 imposes a new tax.)

Under the ballot measure, the carbon tax rate would increase by $2 a year until all of the state’s greenhouse gas reduction goals for 2035 are met and all those for 2050 are on track to be met. The state’s goals include reducing overall emissions to 25 percent below 1990 levels by 2035, and by 50 percent below 1990 levels (or 70 percent below the state’s expected emissions for that year) by 2050. These are ambitious goals, so the annual rate increases could continue for quite some time.

Revenues would be dedicated to environmental efforts, with 70 percent dedicated to a clean air and clean energy account, 25 percent dedicated to a clean water and health forest account, and 5 percent dedicated to a healthy communities account.

According to the state’s Office of Financial Management, the new tax would raise an estimated $2.3 billion over the first five years. It is likely that more than half of the incidence of the tax will fall on motor fuel, acting as a sort of second gas tax, albeit one dedicated to environmental protection rather than infrastructure.

Under I-732, the rejected ballot measure from 2016, the carbon tax was to be offset by reduced reliance on other taxes. For instance, when the carbon tax would have stood at $15 per ton, the sales tax rate was to be cut from 6.5 to 6 percent, and the manufacturing rate under the Business & Occupation tax was slated for near-elimination, with the rate slashed from 0.484 to 0.01 percent. By contrast, I-1631 offers no such offsetting reductions.

There’s a reason why no state has yet adopted a carbon tax, though many have considered it: this sort of policy is exceedingly difficult to accomplish at the state level.

As we have noted previously, when a state goes it alone on carbon taxation, interstate (and international) competition makes the environmental, as well as the economic, benefits less certain. A carbon tax substantially increases the cost of manufacturing in Washington, giving other states’ manufacturers an advantage in and out of Washington.

To the extent that Washington already cares about ecologically sensitive manufacturing processes and power generation and uses legal and regulatory processes to promote them, taxes that drive manufacturing and energy out of state (termed “leakage”) can actually lead to worse ecological outcomes, as these activities take place in less regulated environments. The adverse impact on Washington businesses could produce little or no environmental benefit absent broader coordination. A carbon tax in a single state is likely to yield more “leakage” of trade-exposed energy intensive industries than a national tax, as capital mobility across state lines is greater than capital mobility across international borders. I-1631 seeks to address this concern by specifically exempting many trade-exposed energy intensive industries from the tax, though this approach (1) cannot address all such industries and (2) potentially errs in the other direction, creating nonneutralities which harm less exposed industries.

State-levied carbon taxes are also likely to be clumsier than what can be implemented at the federal level. I-1631, for instance, essentially falls on energy (electricity, fossil fuels, etc.), not on carbon emissions more broadly. This makes sense given the constraints of state policy implementation–alternatives would be too burdensome and result in high compliance costs–but limits the effectiveness of the tax, effectively turning it into a second level of utility and motor fuel taxes, just with different uses for the revenue.

Proponents of I-1631 hope the third time’s the charm, but it remains to be seen whether voters will see I-1631 as an improvement upon prior efforts.

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