State-Level Carbon Taxes and the Dormant Commerce Clause: Can Formulary Apportionment Save the World?
17 Pages Posted: 5 Jun 2014 Last revised: 16 Aug 2014
Date Written: June 4, 2014
This short Article, a contribution to a symposium, outlines some possible design responses to the primary legal issue raised by the implementation of a state-level carbon tax. There are at least two reasons for states to consider a carbon tax. First, somewhat prosaically, the Environmental Protection Agency just released draft rules requiring states to reduce carbon emissions; these rules appear to permit states to achieve at least some of the required reduction through carbon taxes. Second, and more importantly, economists offer strong arguments for preferring carbon taxes as a method of greenhouse gas mitigation. Accordingly, even before the new EPA rules were proposed, a carbon tax was already being considered in some U.S. states, such as Oregon, and a carbon tax is in place in one Canadian province, British Columbia.
The primary legal issue with a state-level tax in the United States is the following: a carbon tax imposed in only one state will presumably make goods and services produced in that state more expensive. The direct response would be to impose a complementary carbon tax on imports. Yet it would appear that the dormant Commerce Clause, and particularly the Supreme Court’s narrow interpretation of the complementary tax doctrine, bars the way to such border adjustments. This Article argues that appearances might be deceiving and that border adjustments might be possible. Alternatively, this Article argues that formulary apportionment could take the place of border adjustments.
Keywords: carbon taxes, dormant commerce clause, formulary apportionment, subnational taxation
Suggested Citation: Suggested Citation