A key piece of Governor Jay Inslee’s 2017-19 biennial budget proposal is a $25 per metric ton carbon tax on the production and consumption of fossil fuels. The tax would take effect in 2018 and raise approximately $1 billion in net revenue over the next biennium. It would come on top of existing taxes paid by the petroleum industry, and a carbon cap fee schedule Inslee implemented by executive fiat last year. However, the proposed carbon tax is set for a rocky ride in the State Senate.
At the same time the idea is resurfacing in the Governor’s budget, a recent report from the Washington Research Council (WRC) underscores the $1.85 billion annual economic impact of the petroleum industry in Washington state. Policy experts and state lawmakers warn the tax could cause industry employers to scale down Washington operations and cut high-paying jobs in counties such as Whatcom, while hitting commuters’ wallets at the gas pump.
Dangling A Carrot
During a January 7 Associated Press legislative forum, Inslee told reporters he hopes to soften up Republican opposition to the carbon tax by using some of its revenue to fund major irrigation projects in Eastern Washington, located in Republican-held legislative districts.
“This is very important to many places across the state,” Inslee said. “I hope people will consider that.”
Rep. Joe Fitzgibbon (D-34) chairs the House Environment Committee. Asked about the likelihood of the carbon tax making it into the final budget, he said he didn’t feel qualified to predict the outcome, especially since members haven’t seen the Republican budget proposal yet. However, Fitzgibbon added, “Any big tax is going to face an uphill battle.”
Fitzgibbon said the idea has merit because a carbon tax is the “most free-market climate policy out there,” and one that large businesses might consider as a more “market friendly” alternative to Inslee’s carbon cap rule.
Sen. Tim Sheldon (D-35) is vice chair of the Senate Energy, Environment and Telecommunications Committee. He is the only Democratic member of the Senate Majority Coalition Caucus.
Sheldon told Lens the carbon tax has a “low probability” of making it into the final budget approved by the legislature. He called the tax a political “non-starter.”
Inslee’s pitch is also unlikely to sway the Senate Energy, Environment and Telecommunications Committee ChairDoug Ericksen (R-42). Potential impacts of a carbon tax could be especially felt in his district, where BP’s Cherry Point refinery is located. The state’s largest refinery, it contributes 236,000 of the 660,000 barrels of oil produced daily in Washington. According to a 2015 economic impact report, the refinery directly employs over 1,000 people and supports 8,400 additional jobs.
Big Jobs Multiplier, But Taxed Highly
In total, Washington refineries provide 2,097 direct jobs, with an average annual wage around $127,000. However, the industry’s high job multiplier effect creates approximately 10.93 total jobs for every direct job.
The petroleum industry already contributes a disproportionately high amount of tax revenue compared to the number of workers, due to a combination of high production output and the state tax system. That is according to WRC Research Director and Senior Economist Dr. Kriss Sjoblom.
In 2015, Washington’s five refineries paid $126.3 million in state and local taxes. The WRC report written by Sjoblom found that this is three times the tax burden in California for refineries of equal production rates. He attributes this to the state gross receipts (B&O) and hazardous substance taxes that apply to refineries. California has a corporate income tax which is based on profit, not revenue.
Production Cuts Possible
Adding a carbon tax on top of taxes already incurred “could lead the refineries over time to reduce their oil production here and increase it somewhere else,” said Sjoblom.
Sen. Sharon Brown (R-8) put it more bluntly. She told Lens the tax would be a “job killer” by weakening the state’s business climate for refineries. Brown is also a member of the Senate Energy, Environment and Telecommunications Committee.
Drivers Would Pay, Too
However, drivers would also shoulder the tax burden, said Sjoblom.
“The whole point of the carbon tax is to make it more expensive for people to emit carbon,” he said. “And ultimately, the emission of carbon is coming from the tailpipes of cars. It’s not coming from the refineries, for the most part.”
Lawmakers, Voters Repeatedly Skeptical
Inslee has faced difficulty getting carbon-related proposals through the legislature. In 2015, his cap and trade proposal failed to reach the State House floor for a vote. During the same session, he unsuccessfully attempted to get legislative approval for a low carbon fuel standard.
Voters have weighed in, as well. In November by a 60 percent majority, they rejected Initiative 732. It would have created a state carbon tax.
The Senate’s 2017-19 operating budget is expected to be released sometime after the State Economic and Revenue Forecast Council’s revenue update is released March 16. The House’s proposed budget is expected to come out sometime after the Senate version.