THE SENATE

S.B. NO.

1004

THIRTY-SECOND LEGISLATURE, 2023

 

STATE OF HAWAII

 

 

 

 

 

 

A BILL FOR AN ACT

 

 

relating to taxation.

 

 

BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF HAWAII:

 


SECTION 1. The legislature finds that assessing a tax on producers and importers of fossil fuels has been successful in countries around the world in reducing the consumption of fossil fuels. The effect of the tax, which is commonly known as a carbon price or carbon tax, has been to reduce the emission of greenhouse gases, leading to a more sustainable environment and reducing local air pollution.

Dozens of eminent economists have endorsed a policy that taxes carbon and returns revenues, commonly known as dividends, to households. The University of Hawaii Economic Research Organization (UHERO) conducted a study on a carbon tax that was released in April 2021 entitled, "Carbon Pricing Assessment for Hawaii: Economic and Greenhouse Gas Impacts". The study explored how a carbon tax and dividend policy would affect Hawaii and found that it would substantially reduce the consumption of fossil fuels while financially benefiting most Hawaii households. Low-income households would experience the greatest financial benefit.

As of 2022, a total of 3,623 economists had signed a statement on carbon dividends endorsing a carbon tax, including twenty-eight Nobel Laureate economists, four former Chairs of the Federal Reserve, and fifteen former Chairs of the Council of Economic Advisors. The statement reads, in part: "A carbon tax offers the most cost-effective lever to reduce carbon emissions at the scale and speed that is necessary." The statement goes on to say that the carbon tax should be increased until emission reduction goals are met. It continues by stating: "To maximize the fairness and political viability of a rising carbon tax, all the revenue should be returned directly to U.S. citizens through equal lump-sum rebates. The majority of American families, including the most vulnerable, will benefit financially by receiving more in 'carbon dividends' than they pay in increased energy prices."

The legislature additionally finds that more than forty countries have adopted a carbon tax or other carbon pricing policy, and even more are considering it. The World Bank asserts that "carbon pricing is the most effective way to reduce emissions, and all jurisdictions must go further and faster in using carbon pricing policies as part of their climate policy packages." The level of pricing is key, and according to the World Bank, fossil fuels must be priced between $50 and $100 per ton of carbon dioxide emissions in the next few years to put the world on the path to achieving the goals of the Paris Agreement. The Group of 20 (G20), which includes the United States, the European Union, China, India, and Russia, representing ninety per cent of the world's economy, encourages the appropriate use of carbon pricing when used among a wide set of tools to control climate change.

Carbon pricing bills have been introduced in the State for the past several sessions. Basic economics explains how carbon pricing would reduce the consumption of fossil fuels. Though some have questioned the financial impacts of carbon pricing on Hawaii's families, particularly on those in the lowest income bracket, this concern was addressed in the UHERO study.

Additionally, the UHERO study examined two levels of carbon taxes, a low tax scenario and a high tax scenario. The study also examined two uses of the tax revenue: one with all of the tax revenue used to finance government programs, and the other with most of the tax revenue distributed to Hawaii's households. The study concluded that the consumption of fossil fuels would be substantially reduced in both tax scenarios. The study also concluded that distributing most of the tax revenue to Hawaii's households in the low tax scenario would create a net financial benefit to most of Hawaii's households, with the largest net financial benefit to low-income households.

Further, the study found that the dividend makes the carbon tax and dividend model progressive rather than regressive. This model addresses the concerns of those who had questioned the effect of a carbon tax on low-income families. Under this model, in the low tax scenario, low-income households would benefit financially, on average, because their dividend would be larger than their increased spending resulting from the carbon tax. This Act incorporates many of the elements of the low tax scenario of the UHERO study and distributes most of the tax revenue to Hawaii's households in the form of refundable tax credits. The level of taxation is within the range that the World Bank has determined would achieve the goals of the Paris Agreement.

This Act establishes carbon tax rates that are derived from the low tax scenario of the UHERO study. This Act initiates the tax in 2024 (one year earlier than the UHERO date) with a modified tax rate. By 2026, this Act's tax rates will be equivalent to those in the study and the equivalency will continue through 2036. As it is difficult to make accurate projections about revenues and the resulting tax credits for 2037 and beyond, this Act charges the office of planning and sustainable development, in consultation with the department of taxation, with recommending future tax rates and credits. To ease implementation, this Act uses the same units of measure as the existing Environmental Response, Energy, and Food Security Tax, commonly known as the barrel tax, specifically: dollars per barrel for crude oil and refined petroleum products and dollars per million British thermal units (Btus) for coal and natural gas.

To convert from dollars per metric ton of carbon dioxide equivalent (CO2e) to dollars per unit of fuel, this Act uses the U.S. Environmental Protection Agency's Emission Factors for Greenhouse Gas Inventories (modified April 1, 2021). For petroleum and refined petroleum products, this Act utilizes the metric tons of emissions for carbon dioxide, methane, and nitrous oxide per gallon of fuel. For coal and natural gas, this Act utilizes the metric tons of emissions for carbon dioxide, methane, and nitrous oxide per MMBtu of fuel. The emissions of carbon dioxide, methane, and nitrous oxide can be combined into emissions of carbon dioxide equivalent (CO2e) by multiplying the amount of carbon dioxide, methane, and nitrous oxide by their one hundred-year global warming potential (GWP). The GWPs for carbon dioxide, methane, and nitrous oxide are one, twenty-five, and two hundred ninety-eight, respectively. Then to arrive at the tax rate, the CO2e emissions factor is multiplied by the carbon tax. The emissions factors for gasoline, for example, for carbon dioxide, methane, and nitrous oxide are 8.78 kg CO2/gallon, 0.38 g CH4/gallon, and 0.08 g N2O/gallon, respectively so its CO2e emissions rate is: (8.78/1000 + 0.38*25/1000 + 0.08*298/1000) = 8.81 kg CO2e/gallon. There are forty-two gallons in each barrel of crude oil (bbl). Multiplying by forty-two gallons/bbl and dividing by one thousand to convert from kilograms to metric tons (MT) yields a rate of 0.37 MT CO2e/bbl.

The legislature also finds that this same methodology can be used to derive the CO2e emissions rate for all fossil fuels. These emission rates can then be used to convert carbon tax rates to tax rates in more familiar units. Again, using gasoline as an example, the per barrel tax rate for a $59/MT of CO2 tax rate is computed as follows (converting from dollars based in year 2012 to dollars based in year 2023): $59/MT of CO2e * 0.37 MT of CO2e/bbl = $21.84/bbl. Therefore, this Act adds to the existing barrel tax so the final barrel tax on non-aviation petroleum based fuels includes an additional $1.05/bbl, and for gas and coal, an additional $0.19/MMBtu is included. So the final per barrel tax corresponding to a $50/MT of CO2 is: $21.84 + 1.05 = $22.89/bbl.

In Hawaii, a carbon tax would very likely have the effect of raising the selling prices of fossil fuels. Such an increase would move fossil fuel prices closer to their true unsubsidized prices as the fossil fuel industry receives both direct and indirect subsidies. Fossil fuel prices do not include the social cost of degradation of the environment that results from the burning of fossil fuels and the resulting damage to human health and welfare. A recent report by the International Monetary Fund estimates total U.S. fossil fuel subsidies and social costs to be $649 billion a year.

This Act distributes an amount equivalent to most of the tax revenue to individuals who file Hawaii income tax in the form of refundable tax credits. The refundable tax credit is the same amount for each category of taxpayer. For example, all taxpayers filing as single or married filing separately are eligible for the same amount. This methodology is consistent with the UHERO study in distributing most of the tax revenue to Hawaii's households.

Interest in a carbon tax is growing in the United States at all levels of government because it is effective and because it can be used with other efforts to control carbon emissions. Recently, for example, United States Secretary of the Treasury Janet Yellen signed a commitment to the Group of 7 (G7) to meet net zero goals and environmental objectives by making "the optimal use of the range of policy levers to price carbon." Secretary Yellen emphasized its positive effect on jobs, growth, competitiveness and fairness.

Accordingly, the purpose of this Act is to establish the carbon cashback program, which sets a carbon tax on fossil fuels and returns an equivalent amount of the money generated by the carbon tax, less administrative costs, to Hawaii residents in the form of a refundable tax credit or cash payment.

SECTION 2. Chapter 235, Hawaii Revised Statutes, is amended by adding a new section to be appropriately designated and to read as follows:

"235-   Tax credit; carbon emissions tax. (a) There shall be allowed to each qualified taxpayer subject to the tax imposed under this chapter, a refundable income tax credit that shall be deductible from the taxpayer's net income tax liability, if any, imposed by this chapter for the taxable year in which the credit is properly claimed.

(b) The amount of the tax credit shall be equal to the sum of the following:

(1) $65 for 2024

$210 for 2025

$360 for 2026

$380 for 2027

$420 for 2028

$440 for 2029

$440 for 2030

$440 for 2031

$440 for 2032

$450 for 2033

$460 for 2034

$470 for 2035

$480 for 2036

for taxpayers filing as single or married filing separately;

(2) $65 for 2024

$210 for 2025

$360 for 2026

$380 for 2027

$420 for 2028

$440 for 2029

$440 for 2030

$440 for 2031

$440 for 2032

$450 for 2033

$460 for 2034

$470 for 2035

$480 for 2036

for taxpayers filing as a head of household; or

(3) $130 for 2024

$420 for 2025

$720 for 2026

$760 for 2027

$850 for 2028

$880 for 2029

$880 for 2030

$880 for 2031

$880 for 2032

$900 for 2033

$920 for 2034

$940 for 2035

$960 for 2036

for taxpayers filing a joint return or as a surviving spouse; and

(4) $30 for 2024

$100 for 2025

$180 for 2026

$190 for 2027

$201 for 2028

$220 for 2029

$220 for 2030

$220 for 2031

$220 for 2032

$220 for 2033

$230 for 2034

$230 for 2035

$240 for 2036

per qualifying dependent who is a minor.

(c) If the tax credit claimed by the taxpayer under this section exceeds the amount of the income tax payments due from the taxpayer, the excess of credit over payments due shall be refunded to the taxpayer; provided that the tax credit properly claimed by a taxpayer who has no income tax liability shall be paid to the taxpayer; provided further that no refunds or payments on account of the tax credit allowed by this section shall be made for amounts less than $1.

All claims for the tax credit under this section, including amended claims, shall be filed on or before the end of the twelfth month following the close of the taxable year for which the credit may be claimed. Failure to comply with the foregoing provision shall constitute a waiver of the right to claim the credit.

(d) The director of taxation:

(1) Shall prepare any forms that may be necessary to claim a tax credit under this section;

(2) May require the taxpayer to furnish reasonable information to ascertain the validity of the claim for the tax credit made under this section; and

(3) May adopt rules under chapter 91 as may be necessary to effectuate the purposes of this section.

(e) All of the provisions relating to assessments and refunds under this chapter and under section 231-23(c)(1) shall apply to the tax credit under this section.

(f) As used in this section:

"Qualified taxpayer" means 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.

"Qualifying dependent" means a minor who:

(1) Resides with the qualified taxpayer; and

(2) Is claimed as a dependent by the qualified taxpayer."

SECTION 3. Section 128D-2, Hawaii Revised Statutes, is amended by amending subsection (a) to read as follows:

"(a) There is created within the state treasury an environmental response revolving fund, which shall consist of moneys appropriated to the fund by the legislature, moneys paid to the fund as a result of departmental compliance proceedings, moneys paid to the fund pursuant to court-ordered awards or judgments, moneys paid to the fund in court-approved or out-of-court settlements, all interest attributable to investment of money deposited in the fund, moneys deposited in the fund from the environmental response, energy, carbon emissions, and food security tax pursuant to section 243-3.5, and moneys allotted to the fund from other sources."

SECTION 4. Section 201-12.8, Hawaii Revised Statutes, is amended by amending subsection (a) to read as follows:

"(a) There is created within the state treasury an energy security special fund, which shall consist of:

(1) The portion of the environmental response, energy, carbon emissions, and food security tax specified under section 243-3.5;

(2) Moneys appropriated to the fund by the legislature;

(3) All interest attributable to investment of money deposited in the fund; and

(4) Moneys allotted to the fund from other sources, including under section 196-6.5."

SECTION 5. Section 243-3.5, Hawaii Revised Statutes, is amended to read as follows:

"243-3.5 Environmental response, energy, carbon emissions, and food security tax; uses. (a) In addition to any other taxes provided by law, subject to the exemptions set forth in section 243-7, there is hereby imposed a state environmental response, energy, carbon emissions, and food security tax on each barrel or fractional part of a barrel of petroleum product sold by a distributor to any retail dealer or end user of petroleum product, other than a refiner. The tax [shall be $1.05] on each barrel or fractional part of a barrel of petroleum product [that is not aviation fuel; provided that of the tax collected pursuant to this subsection:] shall be in the amounts provided in the following table:

Product  2024  2025  2026  2027

Butane $4.26 $10.86 $17.73 $18.40

Propane $3.80 $ 9.46 $15.35 $15.93

Gasoline $5.27 $13.96 $23.00 $23.89

Diesel $5.95 $16.06 $26.57 $27.60

Kerosene $5.93 $15.97 $26.42 $27.44

Aviation gas $3.99 $12.22 $20.77 $21.61

Jet Fuel $4.68 $14.33 $24.37 $25.35

No. 6 Fuel Oil $6.46 $17.62 $29.22 $30.35

LPG $3.78 $ 9.41 $15.26 $15.83

Other $5.99 $16.18 $26.76 $27.80

 

Product 2028 2029 2030 2031

Butane $19.09 $19.81 $20.55 $21.30

Propane $16.52 $17.14 $17.77 $18.42

Gasoline $24.80 $25.74 $26.71 $27.71

Diesel $28.66 $29.75 $30.88 $32.04

Kerosene $28.50 $29.58 $30.70 $31.86

Aviation gas $22.48 $23.37 $24.28 $25.23

Jet Fuel $26.37 $27.41 $28.49 $29.60

No. 6 Fuel Oil $31.53 $32.73 $33.98 $35.26

LPG $16.42 $17.03 $17.66 $18.31

Other $28.87 $29.98 $31.11 $32.28

 

Product 2032  2033  2034  2035

Butane $22.08 $22.89 $23.72 $24.57

Propane $19.09 $19.78 $20.49 $21.22

Gasoline $28.74 $29.80 $30.88 $32.01

Diesel $33.23 $34.46 $35.73 $37.03

Kerosene $33.04 $34.27 $35.53 $36.82

Aviation gas $26.20 $27.20 $28.23 $29.29

Jet Fuel $30.74 $31.91 $33.12 $34.37

No. 6 Fuel Oil $36.57 $37.93 $39.33 $40.77

LPG $18.97 $19.66 $20.36 $21.09

Other $33.48 $34.72 $36.00 $37.31

 

Product 2036 and each year thereafter

Butane $25.44

Propane $21.97

Gasoline $33.16

Diesel $38.37

Kerosene $38.15

Aviation gas $30.39

Jet Fuel $35.65

No. 6 Fuel Oil $42.25

LPG $21.84

Other $38.66

The tax for each year referenced above shall take effect on January 1 of that year and shall continue until the effective date of the next increment.

The tax imposed by this subsection shall be paid by the distributor of the petroleum product.

(b) Tax revenues collected pursuant to subsection (a) shall be distributed in the following priority each fiscal year, with the excess revenues to be deposited into the general fund:

(1) [5 cents of the tax on each barrel] $1,116,000 shall be deposited into the environmental response revolving fund established under section 128D-2;

(2) [4 cents of the tax on each barrel] $892,800 shall be deposited into the energy security special fund established under section 201-12.8;

(3) [5 cents of the tax on each barrel] $1,116,000 shall be deposited into the energy systems development special fund established under section 304A-2169.1;

(4) [3 cents of the tax on each barrel] $669,600 shall be deposited into the electric vehicle charging system subaccount established pursuant to section 269-33(e); [and]

(5) [3 cents of the tax on each barrel] $669,600 shall be deposited into the hydrogen fueling system subaccount established pursuant to section 269-33(f)[.];

(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 established under section 248-8; 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 established under section 248-8.

[The tax imposed by this subsection shall be paid by the distributor of the petroleum product.

(b)] (c) In addition to subsection (a), the environmental response, energy, carbon emissions, and food security tax shall also be imposed on each one million British thermal units of fossil fuel sold by a distributor to any retail dealer or end user, other than a refiner, of fossil fuel. The tax [shall be 19 cents] on each one million British thermal units of fossil fuel[; provided that of the tax collected pursuant to this subsection:] shall be in the amounts provided in the following table:

Fuel  2024  2025  2026  2027

Coal (all

forms) $1.29 $3.55 $5.90 $6.13

Natural gas

(including

liquefied

natural gas) $0.80 $2.04 $3.34 $3.47

 

Fuel  2028  2029  2030  2031

Coal (all

forms) $6.37 $6.61 $6.87 $7.13

Natural gas

(including

liquefied

natural gas) $3.60 $3.73 $3.87 $4.02

 

Fuel  2032  2033  2034  2035

Coal (all

forms) $7.39 $7.67 $7.95 $8.24

Natural gas

(including

liquefied

natural gas) $4.16 $4.31 $4.47 $4.63

 

Fuel 2036 and each year thereafter

Coal (all

forms) $8.54

Natural gas

(including

liquefied

natural gas) $4.80

The tax for each year referenced above shall take effect on January 1 of that year and shall continue until the effective date of the next increment.

The tax imposed by this subsection shall be paid by the distributor of the fossil fuel.

(d) Tax revenues collected pursuant to subsection (c) shall be distributed in the following priority each fiscal year, with the excess revenues to be deposited into the general fund:

(1) [4.8 per cent of the tax on each one million British thermal units] $49,000 shall be deposited into the environmental response revolving fund established under section 128D-2;

(2) [14.3 per cent of the tax on each one million British thermal units] $147,000 shall be deposited into the energy security special fund established under section 201‑12.8; and

(3) [9.5 per cent of the tax on each one million British thermal units] $98,000 shall be deposited into the energy systems development special fund established under section 304A-2169.1.

[The tax imposed by this subsection shall be paid by the distributor of the fossil fuel.

(c)] (e) The tax imposed under subsection [(b)] (c) shall not apply to coal used to fulfill [a signed] an existing power purchase agreement between an independent power producer and an electric utility that is in effect as of June 30, 2015[.]; provided that this exemption from taxation shall not apply to any extension of an existing power purchase agreement or to any subsequent power purchase agreement. An independent power producer shall be permitted to pass the tax imposed under subsection [(b)] (c) on to an electric utility. In [which case,] any case in which the tax is passed on, the electric utility may recover the cost of the tax through an appropriate surcharge to the end user that is approved by the public utilities commission.

[(d)] (f) A gas utility shall be allowed to recover the cost of the tax imposed under subsection [(b)] (c) as part of its fuel cost in its fuel adjustment charge without further approval by the public utilities commission.

[(e)] (g) Each distributor subject to the tax imposed by subsection (a) or [(b),] (c), on or before the last day of each calendar month, shall file, in the form and manner prescribed by the department, a return statement of the tax under this section for which the distributor is liable for the preceding month. The form and payment of the tax shall be transmitted to the department in the form and manner prescribed by the department.

[(f)] (h) Notwithstanding section 248-8 to the contrary, the environmental response, energy, carbon emissions, and food security tax collected under this section shall be paid over to the director of finance for deposit as provided in subsection [(a) or (b),] (b) or (d), as the case may be.

[(g)] (i) Every distributor shall keep in the State and preserve for five years a record in a form as the department of taxation shall prescribe showing the total number of barrels, and the fractional part of barrels, of petroleum product or the total number of one million British thermal units of fossil fuel, as the case may be, sold by the distributor during any calendar month. The record shall show any other data and figures relevant to the enforcement and administration of this chapter as the department may require.

[(h)] (j) For the purposes of this section:

"Barrel" may be converted to million British thermal units, using the United States Department of Energy, Energy Information Administration annual energy review or annual energy outlook.

"Fossil fuel" means a [hydrocarbon deposit,] fuel, such as coal, natural gas, or liquefied natural gas, derived from a hydrocarbon deposit resulting from the accumulated remains of ancient plants or animals [and used for fuel;]; provided that the term specifically does not include petroleum product."

SECTION 6. Section 304A-2169.1, Hawaii Revised Statutes, is amended by amending subsection (b) to read as follows:

"(b) Deposits into the special fund may be from the following:

(1) Appropriations from the legislature;

(2) A portion of the environmental response, energy, carbon emissions, and food security tax pursuant to section 243-3.5; and

(3) Investment earnings, gifts, donations, or other income received by the Hawaii natural energy institute."

SECTION 7. The office of planning and sustainable development, in consultation with the department of taxation, shall recommend updates to the tax per fuel and the corresponding tax credits, and shall submit a report of its findings and recommendations, including any proposed legislation, to the legislature no later than December 1 of the year prior to the convening of the regular sessions of 2034, 2035, and 2036.

SECTION 8. Statutory material to be repealed is bracketed and stricken. New statutory material is underscored.

SECTION 9. This Act shall take effect upon its approval; provided that section 2 and section 5 shall apply to taxable years beginning after December 31, 2023.

 

INTRODUCED BY:

_____________________________

 

 

 

 

 

 

 

 

 

 

 

 


 


 

Report Title:

Environmental Response, Energy, Carbon Emissions, and Food Security Tax; Tax Credit; Office of Planning and Sustainable Development

 

Description:

Establishes a carbon emissions tax credit. Expands the environmental response, energy, and food security tax to include carbon emissions. Applies to taxable years beginning after 12/31/2023. Requires the Office of Planning and Sustainable Development, in consultation with the Department of Taxation, to recommend updates to the tax per fuel and corresponding tax credits.

 

 

 

The summary description of legislation appearing on this page is for informational purposes only and is not legislation or evidence of legislative intent.