Our Policy

Here are the four pillars of our policy proposal:

• Reduce the state sales tax by one full percentage point.
• Fund the Working Families Rebate to provide up to $1500 a year for 400,000 low-income working households.
• Effectively eliminate the B&O business tax for manufacturers.
• Institute a carbon tax of $25 per metric ton CO2 on fossil fuels consumed in the state of Washington.

Here is our legal language and here are some details:

• This tax swap will take place over two years, with the sales tax reduction divided in two (a half-percentage-point reduction in each year) and the carbon tax phasing in from $15 per ton in the first year to $25 per ton in the second year and then increasing thereafter at 3.5% plus inflation (up to a maximum of $100 in 2016 dollars) in order to maintain revenue neutrality. The Working Families Rebate will phase in from 15% of the federal EITC in the first year to 25% of the federal EITC in the second year and beyond. The effective elimination of the B&O tax for manufacturers appears in full in the first year.
• After the two-year phase-in, the value of the reduced sales and business taxes will grow at approximately 1.5% per year plus inflation (about 2%), and we expect carbon emissions to decline by about 2% per year, so after the two-year phase-in the carbon tax rate increases by 3.5% per year plus inflation in order to maintain revenue neutrality. That rate of increase means that it will take more than 40 years for the inflation-adjusted rate to hit the maximum rate of $100 per ton in 2016 dollars. More details here.
• The carbon tax will cover the carbon content of imported electricity (through reports similar to Fuel Mix Disclosure reports), but otherwise it will focus only on fossil fuels consumed in the state of Washington. (See section 4 of the legal language.)
• There is an exemption for sequestered CO2 and there will be a 40-year phase-in for farm diesel and for public transportation systems. (See section 5 of the legal language as well as section 4(6).) Farm diesel amounts to about 52m gallons of diesel (from EIA). Public transportation systems amount to about 40m gallons of diesel and 4m gallons of motor gasoline (from NTD Table 17), including about 17m gallons from ferries (see also WSDOT), about 11m gallons for King County Metro (see also here), and about 12m gallons from other systems. So the total phase-in amount here is about 100m gallons, which is about 2% of state CO2 emissions and small compared to total state consumption of 962m gallons a year of distillate and 2.6 billion gallons a year of motor gasoline. Note that farm diesel and public transportation systems are already exempt from the existing fuel tax; see pages 76-80 (Motor Vehicle Fuel Tax, Chapter 82.36 RCW) and pages 81-83 (Special Fuel Tax, Chapters 82.38 and 70.149 RCW) of the 2010 Tax Reference Manual. Also note that farms and public transportation systems would save money in sales taxes, e.g., King County Metro pays state sales tax on the $100m/year it spends buying buses.
• The Working Families Rebate, which was created in 2008 but never funded, 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 25% bump-up for Washington State comes in the form of a sales tax exemption. (See section 15 of the legal language.)

The total value of this tax swap is about $1.7 billion annually:

• A one-percentage-point reduction in the state sales tax will save taxpayers about $1.3 billion annually; funding the Working Families rebate at a 25% level will provide tax rebate of about $200m annually; eliminating the B&O tax for manufacturing will save taxpayers about $200m annually. This all adds up to $1.7 billion in annual taxpayer benefits.
• CO2 emissions from fossil fuels total about 83m metric tons per year, so with coverage of 90% of those emissions and an expected immediate reduction of about 10% as a result of the carbon tax you get $1.7 billion in carbon tax revenue annually.
• For context, $1.7 billion is about 10% of the tax revenue generated by the state of Washington annually.
• A recent piece of economics research about the impact of carbon pricing on households and manufacturing is “Who Pays a Price on Carbon” by Corbett Grainger and Charles Kolstad (Environment and Resource Economics, 2010). See Table 2 (p365) for the percentage cost increase for different industries from a tax of $15 per ton CO2, and BTW here’s the CMU input-output model they use.