Last week, CalChamber’s tax and privacy guru Sarah Boot wrote about her surprise that a California legislator would introduce a “carbon tax” bill that proposes replacement of the California Sales and Use Tax with a tax on the sale of retail goods based on their respective “carbon intensity.” She’s right to be surprised. When most people talk about a carbon tax, they do so in the context of regulating emissions from stationary facilities, where the debate is over two types of emission reduction techniques: a tax on emissions of carbon (commonly referred to as a carbon tax) or cap-and-trade, a system of market-based controls that can be extended beyond California’s borders.
Consistent with its goals to make a global impact on greenhouse gas reduction, California has repeatedly chosen cap-and-trade as the preferred mechanism, implementing a cap-and-trade system through the Global Warming Solutions Act of 2006 (AB 32, Nunez/Pavley) and extending that program through 2030 via AB 398 (E. Garcia, 2017), which was backed by a mix of Democrats, Republicans, environmentalists and businesses. California’s cap-and-trade program continues to obtain emissions reductions to help the state reach its ambitious 2030 climate goals, with $6.1 billion appropriated to state agencies since 2014 and predicted emissions reductions of over 23 million metric tons of carbon dioxide equivalent (CO2e). These costs are added to the cost of goods produced at cap-and-trade facilities in the Golden State.
This new type of “carbon tax” would result in BOTH a cap on emissions from facilities AND a carbon-based sales tax on the products manufactured in those facilities, potentially driving up the already high cost of living for Californians.
While the bill is being regarded by some as a “study” bill, we think it’s important to ask these questions up front. This is especially true because at the end of the study, without coming back to the legislature, SB 43 requires the California Air Resources Board (CARB) to amend its 2017 Scoping Plan, the document that guides the state’s strategy for meeting its 2030 goals, to include this new carbon-in-lieu-of-sales tax concept. While repeal of the Sales and Use Tax would require legislative approval, concepts included in CARB’s Scoping Plan tend to become a runaway train.
As for SB 43’s version of a carbon tax, like Sarah, I too have many, many questions:
- Would this tax be applicable to products made in a facility that already has its emissions capped under cap-and-trade, resulting in a stacking of carbon taxes?
- Will this apply to the carbon content of fossil fuels before combustion, or the CO2 in combustion gas?
- Will proceeds of this new tax be distributed differently than traditional sales tax, for example, to areas that already have intense local emissions controls?
- Sales tax is calculated at the register, after a shopper has made their decisions. How is an at-the-register variable carbon tax supposed to influence purchasing decisions, a stated goal of the bill?
- The low carbon fuel standard and cap-and-trade program have already increased costs at the pump by more than 50 cents a gallon. Will the sales tax apply to the transportation sector, increasing gas prices ever higher?
- Will it be applied to water, an idea floated in previous CARB Scoping Plans?
- Will there be different taxes for manufacturers who have multiple facilities inside California, resulting in two prices for the same exact item?
- Will livestock production, land tilling, and timber harvesting be taxed?
- How will such a tax effect interstate trucking competitiveness amongst the states?
- How will carbon-intense plane travel be taxed?
- How would we track the carbon intensity of goods imported from outside the US?
- How will small businesses with already slim margins compete?
Scholars are apt to remind us that both climate change-related programs and sales taxes disproportionately impact the pocketbooks of lower-income residents because these Californians spend a larger percentage of their income on basic necessities subject to the tax. This bill proposes that the tax bring in at least as much as the Sales and Use Tax, but does not require CARB to address the inevitable increase in costs to Californians’ daily lives. Even fellow coastal Washington State, which considered but ultimately rejected an initiative to create a traditional facility emissions-based carbon tax, proposed to use the resulting funds to REDUCE the sales tax burden by one percent, fund a tax rebate for low-income households, and reduce other taxes on manufacturers. This bill would stack taxes, far from the “carbon tax” and “revenue neutral” concept espoused by academics proposing these types of emission-based controls.
I hope that the legislature will ask these hard questions and review the real-world impacts of such a proposal before the freight train comes barreling through.