SUBJECT: INCOME, FUEL, Adoption of Carbon Tax, Income Tax Credit for Low Income Ratepayers

BILL NUMBER:  SB 1060, HB 1498

INTRODUCED BY: SB by KEITH-AGARAN, AQUINO, MCKELVEY, RHOADS, Kidani, Moriwaki; HB by SAIKI (by request)

EXECUTIVE SUMMARY:   Establishes a carbon emissions tax credit. Expands the environmental response, energy, and food security tax to include carbon emissions.

SYNOPSIS:  Adds a new section to chapter 235, HRS, granting a refundable tax credit to mitigate the effect of a carbon emissions tax on taxpayers.

Defines a qualified taxpayer eligible for the credit as a resident taxpayer who files an individual income tax return, whether as a single taxpayer, a head of household, a married individual filing a separate return, a married couple filing a joint return, or a surviving spouse.

Defines a qualifying child as a minor who resides with the taxpayer and is claimed as a dependent by the qualified taxpayer.

Amends section 243-3.5, HRS, to rename the barrel tax the “environmental response, energy, carbon emissions, and food security tax.”  Raises the tax from $1.05 on each barrel or fractional part of a barrel of petroleum product to the following:

Replaces the existing earmarks of taxes with the following (per fiscal year), with any excess going to the general fund:

(1)  $1,116,000 to the environmental response revolving fund;

(2)  $892,800 to the energy security special fund;

(3)  $1,116,000 to the energy systems development special fund;

(4)  $669,600 to the electric vehicle charging system subaccount;

(5)  $669,600 to the hydrogen fueling system subaccount;

(6)  All taxes paid on gasoline or other aviation fuel sold for use in or used for airplanes shall be deposited in the airport revenue fund; and

(7)  All taxes paid on gasoline, diesel, or other fuel sold for use in or used for small boats shall be deposited in the boating special fund.

For non-petroleum fossil fuels, the tax per one million BTU is increased from 19 cents to:

Replaces the existing earmarks of taxes with the following (per fiscal year):

(1)  $49,000 to the environmental response revolving fund;

(2)  $147,000 to the energy security special fund; and

(3)  $98,000 to the energy systems development special fund.

Deletes the current exemption for aviation fuel.

Makes technical and conforming amendments.

EFFECTIVE DATE: Taxable years beginning after December 31, 2023.

STAFF COMMENTS:  Carbon Tax Generally:  An economist from UHERO, the University of Hawaii Economic Research Organization, posted an analysis arguing that strong, decisive action such as a carbon tax is going to be needed if we are going to achieve the greenhouse gas goals.  “But without any specifics as to how we are to achieve [greenhouse gas] reductions – through a carbon tax or otherwise – it is largely symbolic,” she argues.

So what is a carbon tax?  It is a tax imposed on the carbon content of different fuels.  Typically, it is due and payable when the fuel is either extracted and placed into commerce, or when it is imported.  At present, neither the U.S. federal government nor any U.S. state has enacted a carbon tax.  The city of Boulder, Colorado, enacted one by referendum in 2006; it applies at the rate of $7 per metric ton of CO₂ and is imposed on electricity generation only.  Several European Union countries, Japan, and South Africa have carbon taxes.

Presently, we have a liquid fuel tax (chapter 243, HRS).  Like a carbon tax, the fuel tax is imposed upon import and entry into commerce.  So, PFM Group, the consultant employed by the Hawaii Tax Review Commission, in its final report thought that the systems and processes we now have in place to collect fuel tax in Hawaii can be adapted to a carbon tax, and for that reason concluded that a carbon tax would entail “[l]little administrative burden.”  There are, however, several important differences between the two.

Both the county and state governments are given the power to impose fuel tax.  This bill does not repeal the state fuel tax and does not affect the counties’ power to impose fuel tax.  Rather, the carbon tax is to replace the barrel tax which is now imposed at $1.05 per barrel of imported petroleum product and on other fossil fuels based on BTU equivalent.

The potential big losers will be the electric companies, because electric generation accounted for 6.8 million metric tons of CO₂ that Hawaii produced in 2013 out of a total 18.3 million metric tons.  However, the electric companies won’t simply absorb the tax, but can be expected to pass on the enhanced costs to anyone who gets an electric bill.

Maybe it’s good for lawmakers to worry about the end of the world as we know it, which perhaps will be staved off by the social change the tax encourages.  But their constituents are worried not about the end of the world, but the end of next week.  Will their paychecks be enough to pay the rent, keep the lights on, or feed the family?  If the cost of simply driving to work from the suburbs is horrible now, just wait until the tax kicks in.

And if you think the hammer of a carbon tax will fall most heavily on huge, faceless corporations like the electric company, the airlines, or the shippers, think again.  Businesses can and will pass on any enhanced costs to their consumers if they hope to continue providing their products or services.  That means our already astronomical cost of living could head further up into the stratosphere.

Applicability of Tax to Aviation Fuel:  There is an issue as to whether this tax as applied to aviation fuel would be preempted by federal law.  The federal Anti-Head Tax Act, 49 U.S.C. § 40116, prohibits any tax, fee, or charge first taking effect after 1994 exclusively upon a business located at an airport unless the tax, fee, or charge is wholly utilized for airport or aeronautical purposes.  49 U.S.C. § 40116(d)(2)(A)(iv).  Although the bill states that tax collected on aviation fuel is paid to the airport fund, there is an issue as to whether the “tax credit to mitigate the effect of a carbon emissions tax on taxpayers,” as the bill titles it, would be considered a use of the tax that is unrelated to airport purposes.  This would be a question of federal, not state, law.

Digested: 2/12/2023