Last Tuesday, Washington State voters rejected a ballot initiative that would have created the first carbon tax in the United States. It was no surprise that the fossil fuel industry worked hard to defeat Initiative 732 (I-732). But the measure was also opposed by several progressive advocacy groups and even environmental groups. In the end, the measure received only 42 percent of the vote.
A national carbon tax has recently gained popularity as a potential bipartisan solution to climate change, with progressives like Sen. Bernie Sanders (I-VT) and the libertarian-leaning Niskanen Center backing the idea. British Columbia has recorded promising reductions in emissions since implementing its own carbon tax in 2008. And Canadian Prime Minister Justin Trudeau is pushing other provinces to adopt their own versions.
So, why did Washington progressives fight the proposal? It wasn’t primarily the idea of such a tax, which is something of a holy grail of climate change policy. Rather, they objected to how the state proposed to use the $2.2 billion in revenues the plan was projected to generate.
Much has been written about the unlikely coalitions formed in opposition to the initiative. Environmental justice groups maintained that the I-732 campaign did not include communities of color or social justice coalitions when formulating the initiative and said that the policy didn’t do enough to address equity in Washington State.
Initiative 732 aimed to create a revenue neutral “tax swap,” mostly with a one percent reduction in state sales tax. It would also have raised money for the Working Families Tax Rebate for low-income households and cut taxes for manufacturers that would pay the tax – an incentive to prevent them from leaving the state.
However, state budget officials estimated that the initiative would actually reduce revenues by $797 million over the first six years. Progressives objected to the tax cut since Washington is already scrambling to fundnecessary services like public education. They also wanted the state to invest some of the new revenues in communities most vulnerable to the effects of climate change. These deficiencies, they argued, made the proposal unacceptably regressive.
My Tax Policy Center colleagues Donald Marron and Adele Morris describe options for using carbon tax revenues in a recent report How to Use Carbon Tax Revenues. They suggested four different goals: Offsetting the new burdens that a carbon tax places on consumers, producers, communities, and the broader economy; supporting further efforts to reduce greenhouse gas emissions; assisting communities most harmed by climate change; and funding unrelated public priorities.
But while these are all appropriate uses, the details matter when dividing up the revenue pie. Using money for one goal often means less for another. This is what turned some progressives against I-732.
Yet, contrary to how they’ve been characterized in the public discourse, tax swaps are a good way to mitigate the inherent regressivity of consumption-based levies such as carbon taxes. Marron and Morris recommend using at least a portion of carbon tax revenue to reduce other regressive taxes that hit low-income consumers hardest, like the sales tax, and that’s just what the Washington initiative would have done.
Analysis shows that a national carbon tax would disproportionately burden low-income consumers, for whom energy costs comprise a larger share of their household budget. Even if companies directly pay the tax, they pass at least a portion on to consumers in the form of higher prices. Returning some of these revenues to low-income consumers through a sales tax break or expansion of low-income tax credit programs can discourage carbon consumption while mitigating regressivity.
Even if a state funnels new carbon tax revenues toward progressive priorities like schools or green energy programs, the money would still be disproportionately drawn from lower-income households. And earmarking new revenues for green energy or other favorite community-based programs would still leave other priorities like k-12 education underfunded, unless the state considered adopting alternative revenue sources. Washington State is one of seven states without an income tax and currently has the most regressive tax system in the country. Environmental groups say they will rewrite the Washington state initiative to fund investment in clean energy and promote equity. But they’ll need to remember that a carbon tax without tax relief for low-income households will ultimately be regressive.
This article first appeared in TaxVox.