Gas Tax Proposal Threatens to Spark Trade War Among Northwest States

The Washington state Legislature is on the cusp of passing a major infrastructure bill, but officials in other nearby states are crying foul over how the package would be paid for and preparing for retaliation if the bill becomes law.

The governors of Alaska, Idaho and Oregon have all condemned a part of the bill that would raise $2 billion by taxing fuel that is refined in Washington but shipped to other states. It would amount to a 6-cent tax on every gallon sold, starting in 2023. The higher taxes would not apply to fuel sold in Washington state, but the fuel tax of 49.4 cents per gallon in Washington is among the highest in the nation.

“Washington State is currently debating a tax that targets Alaska’s fuel costs. Their view of Alaska as a colony is reflected on a tax on all of us,” Alaska Gov. Mike Dunleavy, a Republican, wrote on Twitter.

A state lawmaker in Alaska is already drafting legislation to impose taxes on Alaskan fish sent to other states and on out-of-state ships that dock at Alaska ports, both of which would disproportionately impact businesses from Washington state.

Oregon Gov. Kate Brown said she talked with Washington Gov. Jay Inslee, a fellow Democrat, to try to block the proposal. She said she made it “very clear that Washington taking unilateral action to increase gas prices for Oregon families and businesses is unacceptable.”

In Idaho, Gov. Brad Little and Attorney General Lawrence Wasden asked for a meeting with Inslee, too.

“The Washington Legislature is venturing into new, uncertain territory that would trigger price increases that disproportionately hurt the citizens of Idaho, your neighbors,” they wrote in a letter, asking Inslee to veto the measure if it reaches his desk. “Now is not the time for our states to turn on each other with excise tax proposals that dampen our economy and increase costs for everyone,” they warned.

An Inslee spokesperson said the Washington governor had not received the letter from the Idaho officials as of Tuesday. Inslee “heard [Oregon Gov. Kate Brown’s] concerns” but let her know he “strongly” supports the measure, said Jaime Smith, the Inslee spokesperson, in an email message to Route Fifty.

The legislation “provides the most climate-friendly investments in state history,” Smith said. “Funding sources are always a point of debate, and this plan is no different. He hopes legislators deliver this to his desk and plans to sign it.”

She defended the inclusion of the fuel tax for out-of-state shipments. “Washington produces fuels that benefit communities in other states, and Washingtonians bear the climate impacts of that fuel production. It’s not unreasonable to share the social cost of carbon [dioxide] with those who benefit from our fuel production,” she wrote.

Limited Options in Washington

The out-of-state fuel tax is just one component of a sweeping $16.8 billion, 16-year infrastructure package Washington state Democrats are hoping to pass in the coming weeks.

It would address some of the Democrats’ top priorities for improving the environment and quality of life, as well as making getting around the state easier. The proposal, for example, would include a wide variety of projects, including improving river habitats for salmon, electrifying much of the state-run ferry system, offering free transit rides to children, plus more traditional projects such as bridge repairs and highway extensions.

The biggest source of revenue for the package would come from money raised by Washington’s new cap-and-trade law, which lawmakers passed last year. That is expected to bring in $5.4 billion over the next 16 years. Washington legislators would also use $3.4 billion from new federal infrastructure money, $2 billion in operating funds, $1.4 billion in higher license plate fees and a slew of other funding sources to pay for the improvements.

Still, the reliance on a tax on out-of-state fuel shipments is in line with Washington state’s aggressive approach to taxing fossil fuels.

In fact, Washington state lawmakers proposed a similar “export” tax on out-of-state refined fuel shipments in 2009, but backed down after Alaska lawmakers floated the idea of taxing crude oil shipments into Washington that are used by Washington refineries.

The state also fought a long, and ultimately unsuccessful, legal battle with Native American tribes to impose its fuel taxes on gasoline sold on Native lands.

Plus, Washington state officials have used the state’s crucial position as a coastal state in the supply chain to push environmental goals in recent years. They clashed with their counterparts in Wyoming and Montana over a coal export terminal the interior states wanted to have built in Washington, in order to ship their coal to Asia. Washington state blocked construction, and the U.S. Supreme Court declined to get involved last year.

Taxing out-of-state shipments also avoids a potential political roadblock for Washington state Democrats: If they raise taxes on their own residents, they need to do it with a 60% supermajority vote, which would allow Republicans to block the measure.

Meanwhile, the funding plan for the package gives Democrats a path to avoid pushing for a gas tax hike in an election year, and at a time when some state lawmakers, and federal officials, are eyeing ways to give motorists a break on gas taxes.

Washington state Sen. Marko Liias, the Democrat who chairs the chamber’s transportation committee, told reporters that Washington would join the ranks of states including Florida, Tennessee and Texas that impose taxes on out-of-state oil shipments if the provision becomes law.

Big Impacts Beyond State Borders

Government officials in neighboring states were caught off-guard by the Washington gas tax proposal. Customers in Oregon, Idaho and Alaska would be affected because their motor fuel mostly comes from refineries in Washington state. Oregon and Idaho do not have any refineries, and Alaska only has small ones. Oregon, for example, gets 90% of its refined petroleum from refineries on Washington’s Puget Sound.

Oregon state Rep. Shelly Boshart Davis, a Republican, was so upset by the idea that she testified against the bill at a hearing in the Washington state Legislature.

She remembers the chair of the committee telling her it was a “unique experience” to have an out-of-state lawmaker testifying in front of the committee.

“Well,” she recalled responding, “it’s a unique experience being taxed by another state.”

In an interview with Route Fifty, Boshart Davis said the speed with which the Washington state tax was moving stood in stark contrast to the approach Oregon took when passing its own transportation legislation in 2017. Lawmakers toured the state and took input from residents for a year before passing a gas tax hike, and then they settled on increasing the rate by a penny a year over 10 years.

The Washington state proposal, by comparison, would increase gas taxes by six cents all at once next year, she said.

While Washington and Oregon officials have clashed on various issues over the years, the gas tax hike seems especially “blatant,” Boshart Davis said. “This is literally taking Oregonians’ own money to pay for their own projects.”

If Inslee signs the legislation, it will almost certainly be challenged in court by other states or residents in those states. The U.S. Constitution prohibits states from interfering with interstate commerce, a point that officials in neighboring states have raised repeatedly as they have railed against the Washington state gas tax proposal.

The export tax could also cast a pall on other efforts that require cooperation across borders. Oregon and Washington, for example, recently revived talks over how best to replace a major bridge carrying Interstate 5 over the Columbia River between Portland, Oregon and Vancouver, Washington.

Idaho lawmakers warned of a potential “trade war” if the Washington proposal became law. “The [Idaho] Legislature will take any and all actions necessary to block this new tax on the citizens of Idaho, who should never be subject to taxation without representation,” the Idaho House warned in a resolution it approved on Tuesday.

In Oregon, Boshart Davis said she didn’t think the controversy would die down soon. “Strangely, I think this is just the beginning of the story,” she said. “This is certainly something that won’t go away soon, and we will be exploring all of the tools we have in front of us [to fight it].”