Progressive Revenue

Establish new progressive revenues to fund Greenhouse Gas emission reduction

Background

Switching to a clean energy economy will pay off over the long term, even in just economic terms, but it does impose costs in the shorter term. We will have to invest in electric cars, buses and trucks. We will have to replace our gas infrastructure with electric, and we will have to invest in more renewable sources of electricity. All of this will have to be paid for, much of it with increased private financing, and some with tax-payer dollars. This means raising new taxes, and we believe that it is critical that these new revenues be progressive, so that those most able to pay, pay the largest percentage.

What Funds Are Needed For

  • Public transportation fleets and buildings will need to be electrified. This means City Hall, courts, libraries, schools, community centers, fire stations, police stations — all vehicles and buildings owned by government. Each entity, state, county, city, and school district will need to figure out what this will cost and start planning a transition, including the funding for the transition. Mostly, this will likely slightly raise the cost of new and retrofitted buildings, as well as new vehicles.

  • Government will have to improve public transportation infrastructure to encourage more walking and cycling, as well as improving public transit wherever possible to provide a viable alternative to private cars. In addition, there will be car-based infrastructure, such as automobile recharging facilities, that will also be required.

  • Government will likely have to both require change, such as replacement to electric, and also offer incentives so that this is possible for all people, including people who would otherwise be unable to afford it. These incentives will cost money.

All of this needs to be done against a backdrop where there are many other immediate claims on funds, many of them from emergencies that may themselves arise as a result of climate change. Right now, we have a homelessness crisis, a pandemic, and a major economic downturn competing for resources. However, dealing with climate change must be done now, or we will have yet worse problems than what we have now. We have a rich society, and what is needed is still a small fraction of the total. We just have to come up with a way to structure the cost so that society as a whole will support it.

Possible Revenue Sources

Federal government can raise funds from taxes, and by running a deficit. State and local government must balance their budgets. That said, it is common for state and local government to borrow money against future taxes, as with school or highway bonds. Many of the expenses we are looking at now are capital expenses, where there is a substantial upfront expense that will pay dividends over time. Therefore, some form of financing will be a critical part of the solution.

Taxes levied by the State are harder to evade than taxes levied by an individual city. If Seattle, for instance, decided that gas should have a $2/gallon tax applied, many residents would start driving out of the city to buy gas. If the state did the same thing, only those people who live near the border would likely cross over to buy gas.

Washington State was ranked "by far" the most regressive tax system in the country by the Institute on Taxation and Economic Policy. Households that earn less than $24,000 pay almost 18% in state and local taxes, while the top 1% of households pay just 3%. This is largely because of our reliance on sales tax, which is quite regressive. Any new taxes that are introduced should be progressive, so that the burden is placed on those who can afford it.

Taxes may also work to adjust the relative costs of things, so that things that we want to discourage cost more, and those we want to encourage cost relatively less. This is why we tax alcohol and cigarettes, for instance. One of the most efficient ways to raise money for an energy transformation is to tax fossil fuels, and to use the proceeds to help fund the transition. This would accelerate the conversion by essentially raising the price of fossil fuels relative to other goods and services.

Given the current budget gaps due to decrease in state income from sales tax, and increase in expenditures from Covid-19, state and local governments will likely be looking at ways to raise new taxes, as well as spending cuts.


This graph compares the average US state's income sources to Washington's. Data is pulled from the US Census Bureau.From: Washington State Office of Fiscal Management
Who pays state and local taxes in Washington, by income.From: Institute on Taxation and Economic Policy, Who Pays? 6th Edition
King County revenue sourcesFrom: 2018 Comprehensive Annual Report, King County
Source: Seattle Comprehensive Annual Financial Report 2019

Income tax

Washington State is one of seven states in the nation that has no income tax. The State Constitution requires that any tax on property be uniform, which would rule out a progressive tax where richer people would pay a higher percentage than poorer people. There is a precedent set in a ruling from 1933 which says that income is a form of property, so any income tax would have to be applied uniformly.

Local governments are constrained by the state to 1%, but the city could impose a flat 1% tax on earned income, and presumably it could have the same exceptions that are currently applied to the property tax for seniors and less affluent households. Many other cities and counties already have local income taxes.

The state could also enact a flat income tax, and it would not need to be limited to 1%. Eight other states also have flat income taxes. Some of them tax different sorts of income at different rates — for instance, earned income (e.g. salary) can be taxed a lower rate than unearned income. A flat income tax would be better than the regressive sales tax we rely on now.

Capital gains tax

Governor Inslee has proposed a state capital gains tax on the sales of stocks, bonds, and other assets. The state would apply a 9% tax to capital gains earnings above $25,000 for individuals, and $50,000 for joint filers. It is estimated that 1.5% of Washington households would be subject to this tax, and that the money raised in 2021 would be around $975 million.

City Councilmember Andrew Lewis has proposed a 1% capital gains tax for Seattle, but he has since withdrawn the proposal. It was estimated that this would have raised about $36 million in revenue.

Carbon tax

Washington State has had two different ballot referendums for different forms of carbon tax: I-732 and I-1631, and both were defeated. In spite of this, economically there is a good argument for some form of carbon tax as a part of a climate change solution, as it forces the consumer to bear some of the cost of the externality of the emissions. CarbonWA has been considering some different possibilities, and some form of carbon tax remains on the table for budget discussions in the coming legislative session. Climate Solutions has a good intro to carbon taxes: Carbon Pricing 101 (password 5e^nn96L).

Payroll tax

A payroll tax is like a tax on earned income that is paid by your employer instead of by you. Washington State has a small payroll tax which is for unemployment insurance. Seattle passed a payroll tax in July that will take effect next year and pay for Covid-19 relief, affordable housing, and building electrification. Counties and regional authorities in Washington do not have jurisdiction to apply payroll taxes. The Washington State legislature did consider granting this right in the last session, but the bill did not pass.

Sales tax

The State applies a 6.5% sales tax rate, King County has a 3.5% sales tax rate, and Seattle has a .1% sales tax rate, for a combined total of 10.1%. Sales of groceries, prescription drugs, and some other goods are exempt. Sales taxes are collected by the businesses and sent directly to the state, which disburses back to the county and the city.

Sales taxes are regressive, and they are also volatile, as spending goes down in when people are experiencing financial hardship. Since these periods coincide with when more social services are required, reliance on sales taxes make it very hard to fund social services adequately. Washington is more reliant than most states on sales tax, because it has no state income tax.

Property tax

A property tax is form of wealth tax, levied usually against real estate, payable every year based on an evaluation of what your property is worth. Property taxes are collected by the county, but the state and the city both also get a share of what is collected. Property taxes may be reduced for senior citizens, and for disabled people and some veterans. The property owner of record receives a tax notice by mail with the amount owed.

Wealth tax

A wealth tax is a tax on something you own. A property tax is a form of wealth tax. Suppose you own $1 million worth of Amazon stock. Under a capital gains tax, you would pay a tax when you sell the stock. With a wealth tax, you would pay a tax every year just for owning the stock. Elizabeth Warren and Bernie Sanders each proposed a wealth tax during the Presidential primary election, and some legislators in California are also considering a state wealth tax on assets in excess of $30 million. Imposing a wealth tax and using the proceeds to fund an energy transition would reduce income inequality at the same time.

Business & Occupation tax

Washington State has a Business and Occupation (B & O) tax that taxes businesses based on their gross receipts. This means that there are no deductions for labor, materials or other business expenses. This marks a difference from a corporate income tax which would tax based on the net proceeds. Businesses are taxed at different rates depending on whether they are categorized as retail, manufacturing, wholesaling, or services.

Business License

Businesses must have a license from the city to operate, which has a small annual fee, and in Seattle there is a gross receipts tax that applies to businesses that have a revenue of $100,000 or more.

Developer Impact Fees

Developer impact fees are fees applied to developers to pay for parks, roads, or schools for use by the people using the new facilities. Seattle has Mandatory Housing Affordability, which requires new developments to either add affordable housing, or contribute to a fund for affordable housing . Seattle also has a fee for sewer and electrical hookups, which act as a kind of developer fee. Impact fees vary a lot in different jurisdictions. The Urbanist has an in-depth look at developer impact fees.

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