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Considering a Carbon Tax with Rebates

The Hawaii Tax Review Commission, under our state constitution, convenes once every five years or so to examine and report on our state tax system. It recently published its report addressed to the Legislature.

Its top recommendation is that the state enact a carbon tax, paid by suppliers of  petroleum  products or other fossil fuels. They recommended that the tax be imposed between $56 and $79 per metric ton of CO2 equivalent produced. (For gasoline, this translates to 39 cents to 54 cents per gallon.) And the Commission recommended it purely to disincentivize fossil fuel use to protect the planet, and not for the State to raise revenue.  The Commission estimated that the tax would raise between $450 million and $500 million a year and recommended that 80% of the tax be rebated to taxpayers.

To me, that sounds a little like asking the wolf to guard the henhouse and, after the wolf has stuffed a few chickens in its mouth, to politely ask the wolf to give most of the chickens back.

Why such doubt?  Just last year, our legislature enacted a huge change of heart toward revenue sharing. Our transient accommodations tax, the hotel room tax, had been shared with the counties for decades.  But under HB 862 (2021), the State took it all.  And this was after the Governor had vetoed the bill so providing.  The Governor said, among other things, that the State’s revenue picture didn’t look as bleak as previously forecasted (because we were going to get lots of money in aid from the federal government, for example) and we didn’t have the same pressure to shore up State revenues.  (Indeed, the rebound in this year’s tax collections is “astounding,” according to the Governor.)  The legislature nevertheless overrode the Governor’s veto.

The Commission recommended that the State cut rebate checks either to all individuals or to all but the top 20% earners. I can easily see the Legislature turning this recommendation on its head, keeping the 80% for “immediate revenue needs” (Civil Beat quoted House Finance Chair Sylvia Luke as saying, “There’s too many needs out there and too many things we need to take care of that need immediate attention”), while perhaps rebating a smidgen of the money by either juicing up existing credits for lower income taxpayers like the Earned Income Tax Credit or the Food/Excise Tax Credit, or by enacting a new refundable credit.  In 2020, for example, the Legislature was considering a carbon tax.  SB 3150 SD1 (2020) proposed to impose tax at between $40 and $80 per metric ton of CO2 equivalent and allow a companion refundable credit of between $100 and $500 for a married couple, phasing out entirely at gross annual household income of $75,000.  (Subsequent drafts of the legislation changed the numbers in the bill to blank amounts, leaving taxpayers to guess what our lawmakers were thinking.)  The Commission’s recommended cashback per household, in contrast, is closer to $1,000 assuming the top 20% earners don’t get to participate in it.

And then, even if the carbon tax is enacted as recommended, it’s going to fall particularly hard on folks who live in suburban or rural areas and need to endure long commutes to everyday work.  The Department of Transportation, by the way, is independently studying (and hyping) a road usage charge that would make life even more costly for those commuters by replacing the gasoline tax with a tax based on miles driven. (Or at least they say the gasoline tax will be replaced, but the Legislature may well have other ideas on that point too.)

This, of course, is not the only recommendation the Tax Review Commission came up with. We will be discussing some of the other recommendations in coming weeks.

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