The state of Washington is considering a new initiative to create a $25 tax per ton of carbon dioxide emissions. If the initiative passes, Washington will be the first state in the nation with a carbon tax. Revenue from the tax “would be used to cut the state’s sales tax, and to create a Working Families Rebate, based on the federal Earned Income Tax Credit (EITC), to boost the incomes of low-income households.”
In a study on the impacts of a carbon tax across various income groups, RFF’s Roberton C. Williams III, Dallas Burtraw, and Richard D. Morgenstern find that using carbon tax revenue to fund lump-sum rebates is strongly progressive, more than compensating the bottom 60 percent of the income distribution for the cost of the carbon tax, but it is more costly for the economy as a whole. Using the revenue to cut capital taxes is much more efficient for the overall economy, but also much more regressive, with gains going to the top of the income distribution. Using revenue to cut taxes on labor is an intermediate option that is more progressive (but less efficient) than cutting capital taxes, and more efficient (but less progressive) than a lump-sum rebate. The study did not consider sales tax cuts or targeted rebates, as in the initiative. However, Williams notes that such uses of revenue are progressive, but likely to be relatively inefficient for the economy as a whole.
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