States can do a carbon tax.
Gamage & Shanske 17 – David Gamage, Professor of Tax Law at Indiana University, served as special counsel to the U.S. Department of the Treasury, Office of Tax Policy., Darien Shanske, Professor of Law at UC Davis, 2017 (“A State-Level Carbon Tax with Border Adjustments,” Maurer School of Law: Indiana University, ND, Available Online at https://www.repository.law.indiana.edu/cgi/viewcontent.cgi?article=3542&context=facpub, Accessed on 07-29-23)
Conclusion: A Uniform Division of Carbon for Tax Purposes Act?
Once one state made substantial progress with the base for a carbon tax, other states could copy the model and, ideally, coordinate their tax. There are some partial models for this. Many taxes, such as the sales tax and the corporate income tax, began with specific states taking the lead. And under federal pressure, the states eventually coordinated their corporate income taxes — at least somewhat. Also, the sales tax represents a major tax base that the states exploit and the federal government does not — in dramatic contrast to any other federal system we are aware of. Thus, the states adopting and coordinating a new and significant tax base would hardly be unprecedented and would not be, we believe, too difficult. Further, as we explained at the outset, such actions by the states can have significant impact.
We believe the constitutional issues would be reduced as other states joined in the use of a carbon tax. Suppose that California is the first state to adopt a carbon tax. California does not use any coal for the production of energy.38 By taking carbon intensity into account, some California industries are going to be hurt relative to out-ofstate competitors, but on the whole a court might see that it is mostly out-of-state suppliers that have their output labeled high intensity. As explained above, we do not think that should render the system unconstitutional, but the argument is much easier to see if, say, Illinois, were also to impose a carbon tax and do so in a coordinated way with California. Illinois does produce energy from coal.39 Illinois’s participation thus makes matters particularly clear: The carbon tax does not, by design or in effect, help in-state industries.40 Rather, it is a tax on a global externality.
In the end, we recognize the many reasons states have to shy away from imposing a carbon tax. Our argument is that the inability to impose border adjustments in some form should not itself be seen as an insuperable obstacle.