A Tax by Any Other Name: Washington’s Carbon Fee Proposal

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There’s no shortage of significance in this year’s mid-term elections. While many are obsessed with whether or not a “Blue Wave” will wash over Congress, state elections and some ballot initiatives may actually have a more lasting impact on policy and the economy.

We’ve covered Nevada’s Question 3, which would deregulate the state’s electricity market. Current polling shows an advantage for the “No on 3” campaign. As states and the full spectrum of energy/environment advocates see continued federal gridlock ahead, complex energy policy decisions are showing up more frequently in the voting booth. Washington State deserves just as close a look as Washington, D.C. this election season.

“Initiative 1631” in Washington State would create a carbon fee starting at $15 per metric ton of CO2 in 2020. It’s the third sustained effort in three years to set a price on carbon. A 2016 ballot initiative failed, as did a piece of 2017 legislation. Despite new messaging that emphasizes “fee” rather than “tax,” make no mistake – I-1631 is a carbon tax. Like any other tax on energy, it will land at the doorstep of consumers and increase their costs.

The carbon fee is structured to rise $2 per ton every year and adjust with inflation, meaning it could reach $55 per ton by 2035. It will be assessed on the carbon content of fossil fuels sold or used and electricity generated or shipped into the state. While there are some exceptions in each category, safe to say that it’s a sweeping new tax. Even in the ramp-up, it could raise over $2 billion in the first five years, and reach a total of $30 billion by 2035.

While many taxes, once established, continue into infinity, backers of I-1631 point to provisions that would halt the addition of $2 per year in 2035, provided the state has met its carbon reduction goal. However, assuming this condition is satisfied, the inflation adjustment would continue. If you remember the early 1980s, this clause alone should give you pause.

While proponents say that industries, such as petrochemical refiners and electric utilities, will absorb the fee, costs will inevitably flow down to consumers. Fee supporters also talk up their spending plans, including: clean air and clean energy; clean water and healthy forests investments; and healthy communities. Who doesn’t support these causes? Nevertheless, it’s imperative to ask whether consumers will actually benefit in the end. A new tax of this proportion deserves close scrutiny.

A comprehensive review by NERA shows that, accounting for costs of the tax across the economy and benefits of the planned spending, the carbon tax will cost the average household $440 in 2020, rising to $990 by 2035. It’s only fair to ask why several million households should lose several thousand dollars apiece.

Another aspect of NERA’s analysis that caught my attention – the impact on workers and employment. While part of the new tax would retrain workers in industries tied to fossil fuels, the overall net effect (again, accounting for retraining and associated services) is that the state’s workers’ annual incomes will decline – mostly for workers very far removed from the energy sector.

In the business world, a plan with this much inefficiency and impact on the owners of the company (yes, I’ll stand by the proposition that Washington State voters own their government) would go straight back to the drawing board. While I can’t predict the outcome of the 2018 World Series, in less than thirty days, I’ll bet that I-1631 will swing, miss and record a major league strikeout for the idea of carbon taxes as a fair, simple, and equitable solution.