(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.