(4/25/2008: Updated by correcting two errors)
One of Washington State’s conservative think tanks has just proposed a carbon tax shift. Interesting. (Read it here.)
The Washington Policy Center has garbed its tax shift proposal in anti-government clothing. Some of the rhetoric makes my skin crawl.
But the proposal itself is sensible if modest. It includes a starter carbon tax that pays for a small sales tax reduction. As a bonus, it throws in a business and occupations tax reduction on all capital investment. It’s not goofy. It’s the kind of thing I was hoping we might get about a decade ago, when energy and climate issues weren’t front-page news.
Today, I hope we can do better: a comprehensive, auctioned, regional Cap and Trade system with built-in buffers for working families.
I’m guessing that the political chances of WPC’s proposal are somewhat slimmer than the odds for my preferred climate pricing policy. So rather than engage in a fight over the rhetoric, I’ll use it as a springboard to answering four questions that I’ve had from readers and from people at my speeches on climate policy.
Q: Should other Cascadian jurisdictions adopt BC’s world-leading carbon tax shift, rather than doing Cap and Trade?
A: If I were the czar of climate policy in Cascadia, I would take the best features of BC’s carbon tax shift and integrate them into a comprehensive, auctioned, regional Cap and Trade system with built-in buffers for working families. (I’ll soon publish a short set of essays on how to combine Cap and Trade with a carbon tax.)
Or, I might revive an old proposal from the Swiss debate over carbon tax shifting in the 1990s—a carbon tax shift in which emissions levels automatically trigger carbon tax rate adjustments. If emissions aren’t diminishing fast enough, the tax rate automatically rises and offsetting tax reduction on paychecks rise too. You get the simplicity and game-proofing of a carbon tax plus the climate-protection certainty of Cap and Trade.
But I’m not the czar. No one is. And no Cascadian jurisdiction outside of British Columbia has displayed any interest in enacting a carbon tax shift in the next year or three. (But they might enact a comprehensive, auctioned, regional . . . )
Political momentum can develop quickly, of course, but—as much as I hate to say it—I’d give long odds against a carbon tax shift.
Q: Are there legal or constitutional obstacles to carbon tax shifting in the Northwest states?
A: California, Idaho, and Oregon would have no legal or constitutional problems doing what British Columbia has done. They’ve all got state income taxes to which they could add BC-style Climate Action Dividends—tax reductions for working families coupled with rebates for the lowest income citizens—to ensure climate fairness.
Washington has a problem, though. It has no state income tax and therefore might have difficulty mitigating the sting of climate pricing on working families. Fortunately, the state this year solved this problem for itself: it approved a Working Families Credit that will provide tax refunds to low-income Washingtonians. The state could simply fatten these rebates to offset the impact of climate pricing on working families’ household budgets.
All the Cascadian states could also share the bounty from permit auctions with the least-fortunate families—those that do not pay income taxes—through their existing electronic benefits transfer systems.
Q: Couldn’t Washington ensure fairness for working families by reducing sales tax rates? Sales taxes are so regressive that lowering the rates would surely erase the bite of carbon pricing, right?
A: You’d think. But no.
Energy price increases, which climate pricing will cause, are even more regressive than retail sales taxes. So replacing sales taxes with carbon taxes (or carbon auction) doesn’t make climate pricing fair to working families. The many-talented Yoram Bauman, who co-authored Tax Shift, looked into this question specifically late last year. He determined that working families end up financially worse off from a tax shift that uses carbon tax (or auction) proceeds to replace part of Washington’s sales tax (and its property tax too). Fortunately, devoting only 5 percent of the carbon tax (or auction) revenue to low-income Climate Dividends would make the poorest fifth of families financially whole. To offset the bite of carbon taxes on every family at or below the median income would require only 20 percent of the proceeds, leaving 80 percent for other purposes. And rebating most of the proceeds in equal per-capita payments would leave working families better off than before and begin to compensate for the rank unfairness of climate disruption itself.)
In fact, my biggest substantive objection to Washington Policy Center’s carbon tax shift proposal is that it’s regressive. It does not go far enough to compensate low-income families for the pinch of a carbon tax. Still, in fairness, I should hasten to add: WPC could have done many times worse. It chose the one Washington state tax where reductions would disproportionately help working families. That’s a very good thing. It might have proposed a carbon tax to fund reductions in the state’s business taxes or its property taxes. It made a better choice, from the perspective of climate fairness. I’d just suggest adding a Climate Dividend for families with incomes below the median.
Q: So what’s the problem? Why don’t Northwest states emulate BC’s carbon tax shift?
A: Habitual resistance to anything called a “tax” is ubiquitous in Cascadia’s state capitals. I’m optimistic in the long run but pessimistic in the short run about Cascadian carbon tax shifting outside of British Columbia. The emergence of carbon-tax support from conservative organizations such as the Washington Policy Center only strengthens my long-run optimism. But we need time to reframe the whole idea of taxat
ion, along these lines.
In the short run, my hope is that we sidestep the whole carbon taxation bugaboo and go straight to a . . . (you knew it was coming) . . . comprehensive, auctioned, regional Cap and Trade system with built-in buffers for working families.
Todd Myers
Alan, thanks for looking at my piece. In 1998 I was working for the Sonics. I now realize that I should have been reading your book.You write that my piece “mistakenly assumes that a sales tax reduction will compensate low-income families for the pinch of a carbon tax.” Actually, I agree that it probably won’t. I wrote that “a cut in sales taxes would help low-income families disproportionately, helping to offset the fact that energy taxes would hit those families more.” You are right that it doesn’t go all the way, but it helps, which is what I say.I will say that tolling, cap-and-trade, I-937, etc. all have the effect of increasing energy costs “regressively.” The staff to the state’s Climate Advisory Team admitted that I-937 has increased energy costs more than they expected. Cap-and-trade will also increase energy costs and an auctioned system, while preventing windfalls (which I also oppose) increases price volatility, which also hits those with smaller financial cushions harder.Tolling seeks to get people (primarily lower-income workers) out of their cars and put them on buses as confirmed by the study discussed today in the Seattle Times. Currently those folks are choosing to pay more for the comfort and time savings of driving their own car. Tolls seek to make the cost more than the time is worth. This is trading money for time. Ultimately tolling means taking time away from the poor instead of money they don’t have. This isn’t a savings and it isn’t more choices. It is simply chainging the time vs. money calculation that encourages a different, but not new, choice. And it is not optimal since given the opportunity, those workers would stay in their car.
Alan Durning
Yep. I exaggerated when I said you “mistakenly assumed.” On closer inspection I see that your report merely said the sales tax reduction would help reduce regressivity, though on a quick reading, you sure allowed the reader to believe that the sales tax cut would take care of regressivity.I should have said: “the proposal fails to fully buffer low-income families from the sting of climate pricing. It goes part way but not far enough.”Cap and Trade provides certainty on emissions reductions, which I value even more than I value price certainty. Cap and Trade’s price volatility will be manageable, I believe, if it’s comprehensive, auctioned, and allows some banking and borrowing of permits.
MVP
Wow! Thanks, Alan and Todd, for this fascinating, insightful, and necessary discussion to help hone in on the best climate policy for Cascadia and beyond.And, hey Alan, I think you actually answered four (4) crucial questions in your post :-)*****Go (stay?) Sonics!!!Cheers,Michelle
Alan Durning
I updated the post so it no longer overstates Todd’s claim about regressivity. And I corrected the embarrassing counting error. Four questions!
Barry
I still think all these discussions on carbon taxes and carbon caps are missing a crucial element: they rely solely on a single price for carbon. This single price will need to rise for everyone until the desired cuts are made. But what happens if the majority of emissions are created by a small group of people who are not price-sensitive? In this case carbon price would need to go extremely high before any big cuts are made. In the meantime everything in society from food to heat to transportation goes through the roof for majority of folks.Seem unlikely? Well what about the fact, well documented in a recent Sightline article, that gas prices have risen 230% in the last four years and yet per-capita use is only down ~6% and total use is down ZERO? Here we have seen a tripling of gas prices with NO cut in total demand.Does anyone think we can pass a carbon tax or carbon cap that results in several more dollars per gallon? Does anyone think we can get big cuts in carbon usage without price increases of this magnitude? We haven’t so far.In all these discussions on pure marketplace solutions, is anyone looking at the possibility that most carbon demand could be from a minority of the population that is not very price sensitive? That’s what the data i see shows. Carbon usage is very strongly tied to wealth. Wealth is highly stratified and getting more so.If we do have a strong carbon-wealth linkage, a carbon tax will never be allowed to rise high enough to impact demand significantly…because the majority of folks will be hurt too much by it, and revolt at the ballot box. A carbon cap will likewise lead to such large carbon price increases that they will be scaled back for the same reason. Sightline folks, and others, talk about ensuring climate fairness via climate dividends from carbon tax/cap. That is excellent if it works and really covers the costs for basic energy and transport needs. But what if the carbon price needs to be $300 or $500 a tonne or more as some economists say? What if gas needs to be $10/gallon to cut demand enough? I think single price carbon, without full rebates to lower incomes, is going to fail quickly. So far nobody is doing full rebates, not BC, not anybody. I also think that even with full rebates we could be creating a system that requires silly-big amounts of money are constantly collected and redistributed….all to cut demand by a relatively small number of wealthy emitters. I don’t see how any single-carbon-price system works without the addition of personal emissions caps. The price signals and incentives are all backwards and it will take increasing legal-economic-acrobatics to keep it together.
DRA
Oregon does have a Constitutional problem with carbon taxes, and probably with auctions. Article IX section 3a is so restrictive, and has been restrictively interpreted, so that any income attributable to motor vehicle fuel, or feedstock for such fuel, must necessarily be used for highway construction, operation, etc.I wish it weren’t so. The trick is how to change this limitation. Otherwise the higher the tax, the more road construction you get.
MVP
Great discussion!(And, gosh, Alan, no need for embarrassment! Just tryin’ to keep the numbers straight when I can, since so often I can barely keep up with Sightline’s statistics and such. Math just isn’t my forte! Thanks for updating the original post from “three” to “four” questions. Glad to help 🙂