Revenue-neutral carbon pricing in Washington State

One of the most successful climate policies in the world is the revenue-neutral carbon tax in British Columbia. Created in 2008 by a right-of-center government, BC’s tax is revenue-neutral, meaning that all the money generated is used to rebate personal and corporate income taxes; there is also an offset for low-income households. The tax rose from $10 per ton of CO2 to a $30 peak in July 2012, and has already reduced emissions by 5-10%.

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Policy outline for Washington State


Carbon tax rate: A tax of $30 per metric ton of CO2 on all fossil fuels consumed in the state, including jet fuel and the carbon content of imported electricity. This tax would amount to ≈$0.30/gallon of gasoline or diesel; ≈$0.03/kWh of electricity from coal, and ≈$1.50/mmBTU natural gas (or ≈$0.15/therm or ccf, or ≈$0.015/kWh of electricity). The tax rate would increase by 5% per year.

Climate benefit: Fossil fuel combustion accounts for about 85% of the 100 million metric tons of annual greenhouse gas emissions in Washington.

Revenue generation: Assuming a 10% reduction in emissions, a tax of $30/ton CO2 would initially generate as much as $4.6 billion per biennium ($2.3 billion per year).

Revenue recycling for a $2.3 billion per year carbon tax

1. Reduce the state sales tax by one percentage point: $1.1 billion per year.

The state rate is 6.5% and generates $7.2 billion per year. (City and county levies bring the rate up to as much as 9.5%; see Tax Statistics 2011) Carbon taxes and sales taxes are both regressive, meaning that their burden is greater for lower-income households.

2. Fund the Working Families Rebate: $140 million per year.

$140 million per year could be used to provide up to $1000 a year for about 400,000 low-income working households, according to the Washington Budget & Policy Center. The Working Families Rebate was created in 2008 but never funded; it is modeled after similar programs that exist in 22 other states. Like most of these programs, the Working Families Rebate is a bump-up of the federal Earned Income Tax Credit. (The $140 million figures represent a 20% bump-up.) Since we have no state income tax, the Working Families Rebate is officially structured as a sales tax rebate or exemption.

3. Eliminate the B&O tax for manufacturers: $160 million per year.

The B&O tax as a whole brings in about $3 billion per year, but according to DOR only $160 million is from manufacturing. Major rate categories are manufacturing and wholesaling: 0.484% of gross receipts; retailing: 0.471%; and services: 1.8%. Case studies suggest that the carbon tax may be better than a B&O tax for many manufacturers.

4. Triple the small business B&O tax credit: $65 million per year.

This policy has been analyzed and supported by the Economic Opportunity Institute.

5. Extend the existing high-tech R&D tax credits: $200 million per year.

A high-tech B&O tax credit ($23 million per year) and a high-tech sales tax exemption ($166million per year) are both slated to expire in 2015. (Moreinfo.) Extending these tax credits is a top priority of the Washington Technology Industry Association.

6. Remainder/leeway: $635 million per year.

The legislature could provide additional tax reductions to businesses and/or individuals. One option is to rebate a portion of the state property tax, which is $2.06 per $1000 of market value. The state portion is about 1/4 of total property taxes in the state. Reducing the property tax would provide direct benefits to homeowners and business (the Gates Tax Structure Study Commission estimates that 42% of the incidence of property taxes falls on business) and indirect benefits to renters and consumers. 

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