Environmental Taxation at the Forefront of Washington State’s Ballot Initiatives

Come November 8th, Washington state may be the first to pass a revenue-neutral carbon tax; i.e. a tax on carbon that comes out of the sales tax and other state revenue, incentivizing greener products and services by charging reparations for environmental costs. Initiative 732 claims to promote environmentalism with “four bold steps,” including: a 1% sales tax reduction, a $1,500 state sponsored tax credit for working families, reducing the Business and Occupation, or B&O tax (yes, it’s as bad as it sounds) on manufacturing, and adding a new tax to fossil fuels.

I found three of these proposals to be immediately refreshing. Reducing the sales tax and reducing B&O fees (essentially occupational licensing, but for corporations) are easy victories in their own rights. We have a marginal economic success in lowering Washington’s sales tax, which combined with local taxes becomes one of the highest in the country. Then there’s the B&O system. In and of itself, B&O is an administrative cesspool unique to Washington, wherein the bureaucrats attempt to identify what your proper profit margins should be and levy a flat tax rate on gross receipts, rather than profit. Even a small bite out of that system is for the better. However, the likely reason for its inclusion belies a fundamental implementation problem with any state or local carbon tax.

 

Before addressing that, there is the tax on fossil fuels itself. There’s sound logic behind taxing a form of pollution which is not, and cannot be easily contained within the producer’s private property, and yet it is a necessary byproduct of fundamental economic and practical activities. From the standpoint of property rights grounded in non-aggression, all industrial undertakings — and even people themselves — emit some form of pollution that impacts the property right of others. Whether it’s radiation, indirect effects on the global climate, or damage to public treasures, it’s impractical to address every minuscule violation of rights upon potentially billions of people with contracts that ensure the consent of every party. However, even the small violations add up, and a vanilla system of contracts and courts cannot pragmatically protect against property rights aggression in today’s world. From this, one of the few true needs for a compromise of liberty is born.

The initial solution to the blatant environmental problems of the 70’s was to build a bureaucracy to protect the environment directly and ineffectively, namely the EPA. While the arbitrary mandates, complex initiatives, and expensive bureaucratic accidents have mostly been better than nothing at maintaining the environment since its inception, its design reflects progressives’ fundamental misunderstanding about what the government does well. Government is competent at creating simple incentives — in fact, every law produces an incentive that affects everyone in its jurisdiction. In general, simple laws will produce simple, strong incentives with fewer hidden side effects.

Washington state may have the right idea on a fair approach to climate change, but unfortunately, there are some missing implementation details. First and foremost, this tax will levy additional expenses on products coming out of Washington that go to other states. Out-of-state businesses will now have an unfair, competitive advantage against Washington producers, even those with relatively green production lines. While the law will certainly incentivize lower carbon emissions for activity taking place inside the state, it will also lead to capital flight to nearby states, which invariably creates economic waste (and thereby even environmental waste during the transition period). The Initiative’s offering to reduce B&O taxes will not be enough to offset the significant new expenses, which are also planned to fund the sales tax cut and tax credit. Combined with Seattle’s impending $15 minimum wage and sizable manufacturing presence, Initiative 732 spells certain economic trouble for the Evergreen State.

Washington’s Olympic National Park

Regardless, the state is putting a voice behind an important discussion. With some modifications, the initiative could create a positive impact. Compromises could include limiting the taxes to only affect non-exporting industries such as localized, government-created monopolies (read: utilities). Energy companies cannot be put out of business by a competitor in a different state — a state that doesn’t have a carbon tax — and therefore are ideal for this experiment. Washington consumers will still be paying a premium for energy that out-of-staters are not, but the negative side effects of the tax won’t be as economically disruptive, and clean energy will become financially attractive in the state. Of course, this is assuming that the government allows the market to freely compete in energy, which is another can of worms. But regardless, any attempted workaround will either unfairly hurt state businesses, unfairly tax consumers, or both to some degree, resulting in capital flight (and did I mention unfairness?).

This is a limitation of local and state regulatory regimes, but a pollution tax-based environmental system could avoid bias if implemented on a national scale. Paired with a carbon tariff, the winners are environmentally innovative companies and mankind, and the losers are those who cannot adapt to a shared-environment-friendly free market. And while carbon is a relatively well known and significant pollutant, the tax can and should be generalized to all major forms of waste that have non-localized effects. Less common types of offenses should be handled case by case in the courts, as a basic system of property rights would dictate.

Business regulations of a non-localized nature are among the few items that are better handled at a national level, particularly if combined with appropriate tariffs to ensure the incentive applies throughout America’s reach. An added bonus of the carbon tariff is that it complements the domestic tax by marking up goods from less environmentally friendly factory processes abroad, potentially bringing home more innovative, clean manufacturing jobs without being protectionist for protectionism’s sake. Signing up for a new regulation at the federal level is a difficult pill to swallow, particularly because state regulations tend to highlight bad decisions (read: California regulations) better than national ones (like the FDA). State differences are best exercised in how to spend and collect state-specific funds, and the guaranteed freedom of interstate travel is a powerful balancing force in these cases. Entrusting the feds to appropriate these new taxes (particularly under a Clinton bureaucracy) is worrisome, but having a simple, unambiguous mandate makes for a cleaner implementation. “Thou shalt pay reparations such that the amount paid is equivalent to the market cost of undoing the damage.” Or something like that. For now, the argument is limited to environmental protection against wide-reaching forms of pollution, which is one of the pressing issues of our time.

Back to Initiative 732 — what’s the verdict? Vote yes (if you are so lucky to be a Washington resident). It wasn’t easy to decide one way or another. On the plus side, the law may spur other states into action as is happening with gay marriage and recreational marijuana, and the federal government will only need to create a carbon tariff to complete the solution. The other tax reductions (sales and B&O) may ease the damage. On the other hand, the proposal has the many shortcomings I outlined, and the economic repercussions in the state could actually hurt the discussion on a carbon tax. And that’s not to mention it’s always easier if it’s done right the first time, at the national level…

However, I think all press is good press for an issue which doesn’t get much airtime, and I currently have little faith in our next administration’s ability to properly implement anything of this scale. The sooner that consumption-based pollution taxes take effect, the better, so here’s to Washington state getting environmental.