Washington's Ballot Iniatives 2: Repealing the Carbon Tax
If you've got to tax something... tax something bad
Government provides things we need. Free or subsidized schools, systems to bring us clean drinking water, roads, parks, police and fire protection, the judicial system, health care for those who can’t afford it, trash collection, and so forth. And all these things cost money. How ought we pay for these things a functioning society needs to have?
We could just tally up the total and split the check, sending every family a bill for an even share. In Washington state, as of 2021, that bill would work out to about $27,000 a year for a family of four. While there may be a fortunate few families who could write a check this large without batting an eye, many would find it impossible to come up with that amount of money year in and year out.
So we don’t pay for state and local government that way. We instead rely on a system of taxes that generally collects more from families that have more. You may have heard that Washington’s state and local tax system is regressive, and that’s true. This doesn’t mean that the poor write a bigger check to the government than the rich, but rather that the check represents a larger share of their income. With no income tax, Washington relies heavily on sales taxes. Sales taxes pinch lower-income families much more than the wealthy, because the lower your income the higher the percentage of that income you must spend to cover basic necessities of living.
Since 2021, Washington has added a couple of new revenue sources to the mix. One, which I’ll discuss in a future post, is a tax on capital gains, or the profit made from selling certain assets. The other is a “cap and trade” system for greenhouse gas emissions introduced by the Climate Commitment Act of 2021. Businesses that emit a lot of carbon need to purchase permits to do so. The state auctions off these permits each year, but then businesses are allowed to resell them if they find ways to reduce their emissions.
On paper, this looks like a tax that extracts money from big corporations and not families. In the debate over the policy concerns were expressed that corporations would pass the costs along to consumers, particularly in the form of higher gas prices. Governor Inslee went on record claiming any such impact would be minimal. “Pennies,” to be specific.
So what does the record show? This chart compares the price of gas in two metro areas: Seattle and Houston. In Houston, the price of a gallon of gas as of last month was about the same level as it was in November 2014, about $2.70 per gallon (and indeed I just filled a rental car in Texas last weekend and that’s about what I paid). In Seattle, over the same time period, the average price of a gallon of gas has risen from $3.04 to $4.39. Seattle has always been a more expensive place to fuel up, but the local price premium is a lot higher than it was a decade ago.
Now, to be fair, it’s not clear we can blame the entire trend on Washington’s carbon permits. The first carbon permit auction didn’t occur until 2023, and it’s clear that the Houston-Seattle gap was widening well before then. The price difference held steady around 65 cents per gallon between 2014 and 2016. It was up to 95 cents by September 2020 and $1.33 by September 2021. And in the most recent data it’s $1.65. So perhaps the impact of the Climate Commitment Act exceeds pennies per gallon, but it might only be a few nickels.
The basic policy goal of the Climate Commitment Act is to reduce carbon emissions. The primary mechanism being used to accomplish that goal is raising the price of emitting carbon (there’s a secondary mechanism related to how the revenue gets spent). More than a quarter of US carbon emissions arise from transportation. Were the CCA to not raise the price of gas, people responsible for a significant share of carbon emissions — drivers — would have no incentive to change their behavior. So one could argue that the CCA’s impact on gas prices, whatever the magnitude, is a feature not a bug.
Anytime we raise revenue by imposing a tax on something, we can reasonably expect less of that thing. This is sometimes considered a harmful side effect of taxes. If we tax the interest you earn in your savings account, for example, we’re giving you an incentive to save less. But taxes on things society actually wants less of are a different story. Economists speak of a “double dividend” from taxes on products such as cigarettes and liquor. In one fell swoop, these taxes create an incentive to cut back on something harmful and raise money to help defray the cost of government.
Ballot initiative 2117 would repeal Washington’s cap-and-trade system. It’s reasonable to think that a repeal would lower the price of gas, somewhere in the ballpark of 30 cents a gallon. But it would also cause more carbon emissions — something we don’t want — and force state government to balance the budget by taxing something else, another thing we generally don’t want.