The Lahaina fire gave Hawaii a glimpse of the future and it came at a perilous time. Federal funding is uncertain and communities lack money to deal with the threats of a changing world. Hawaii is trying to address this problem by implementing a “green fee” to help mitigate the effects of climate change. This fee that passed the Hawaii legislature will add a .75% tax to short-term rentals and hotels, as well as an 11% tax on cruise ship fares while docked in Hawaii. This green fee offers a simple, scalable solution for states seeking to mitigate future disasters. Will this be a national model moving forward? I will break down how it compares to other climate change taxes and how it represents a new path forward for states that want to limit future disasters.

Why Traditional Models Fall Short

Currently, there exists a few different types of state-led climate change or “green taxes” that exist. The classic example is the cap-and-trade model used by many states. These programs cap the amount of carbon that companies are allowed to emit. Corporations that pollute have to purchase allowances to cover their pollution, either through the state or a secondary market. A group of Northeast states participate in a version called the Regional Greenhouse Gas Initiative (RGGI), which caps power sector emissions. Programs like the RGGI are complex to build and implement. The advantage to the cap-and-trade model is that it can generate significant revenue. In Washington State, the multi-sector cap-and-trade program has provided more than 2.3 billion dollars to fund projects like electric school buses and free public transport for children.

Cap and trade has been the dominant climate change finance model since the early 2010s. The downsides are evident. These programs are slow to build and lead to more regressive taxes as companies pass along costs to consumers. The Hawaii “green fee’ is a tax as well but it is targeted at tourists with disposable income. It can also be built quickly. Hawaii can rapidly channel tax revenue into native grasslands, sand replenishment and other mitigation projects.

A different model in Vermont and New York is even less carrot, more stick. Designed like federal Superfund Laws, the Climate Superfund Law in Vermont aims to recover funds from fossil fuel companies for financial damages between 1995 and 2004. This money will be used for climate change adaptation.Perhaps inevitably, the Superfund program has already become a magnet for legal challenges by Republicans. The Trump administration, which mentioned Vermont by name in an executive order, is suing alongside several states. Will it survive legal challenges? How large will the pot of money? Substantial funding might come from the Climate Superfund law, but it could also end up being a drawn-out battle in court.

A Path Forward, Following Spain’s Lead

Hawaii’s green fee is novel in the US, but it has precedent in other countries such as Spain. The Balearic Sustainable Tourist Tax institutes a 1-4 euro fee per night for several islands, including Mallorca, during the busy season. The revenue supports conversation and climate change efforts. This tax was launched in 2016 and has already generated a mind-boggling 860 million euros. This level of funding could drive generational change in many states across the country: elevating bridges, moving homes out of floodplains and restoring wetlands.

Real fear exists about the future of federal climate change funding. If other states follow Hawaii’s lead, they will be able to secure funding without having to rely on the whims of the White House.

Alabama:

A series of tax bills that passed the Alabama House last week will get attention in some form before the legislative session ends on 05/15. This includes:

• House Bill 386 lowers the state’s grocery tax from 3% to 2% percent.

• House Bill 387 gives local municipalities the authority to lower sales tax on groceries by resolution or ordinance.

• House Bill 388 doubles the state’s income tax exemption from $6,000 to $12,000 for individuals 65 years old or older who withdraw funds from a defined contribution retirement plan such as a 401(k) or Individual Retirement Account.

• House Bill 389 raises the standard deduction from $2,500 to $3,000 for individuals, and expands dependency exemptions beginning with the 2026 tax year.

Source: Alabama Daily News

Arizona:

Arizona passed the “Arizona Strategic Bitcoin Reserve Act,” allowing 10 percent of public funds to be invested in bitcoin.

• “Lawmakers in Arizona have passed a bill allowing the state treasurer and retirement system to invest up to 10% of available funds in digital assets, specifically bitcoin. The governor has not said whether she will sign the legislation.

Source: Bloomberg

Florida:

Florida house passes tax relief bill, setting up conflict with Florida senate. The session will be extended past the May 2nd end date to resolve the tax issues.

• The house bill would lower states sales tax by .75% from 6% to 5.25%. It would also include provisions to reduce all other sales tax rates by the same amount — commercial rent from 2% to 1.25%; electricity from 4.35% to 3.6%; new mobile home purchases from 3% to 2.25%; and coin-operated amusement machines from 4% to 3.25%.
  

• This legislation would also make changes to the tourist development tax, which is causing the most controversy. The current draft of the legislation would redirect tourist development taxes away from tourism-related efforts to the county’s general revenue coffers and use this money to offset county property taxes beginning in 2026.

• The Florida Senate has floated a more modest plan, including permanent elimination of the sales tax on clothing and shoes costing $75 or less. Other parts of this plan include a permanent reduction in the business rent tax from 2% to 1%, a one-time credit for vehicle registration fees, and several sales tax holidays.

Source: Florida Phoenix

Hawaii:

The Hawaii legislature passed a 0.75% “green fee” to help pay for the effects of climate change.

• Under the bill, the transient-accommodations tax that visitors pay on their nightly hotel and short-term rental stays will increase by .75%, plus travelers who dock in Hawaiʻi on cruise ships will start paying that tax as well, to cover the new fee.

• Those dollars would then be used to cover environmental projects across Hawaiʻi, along with efforts to make the state’s infrastructure and homes more resilient to natural disasters and the changing climate.

Source: Honolulu Civil Beat

Iowa:

Iowa house passes legislation making certain items tax-free, modifies child tax credits and adds income tax credit for radon mitigation. The legislation now moves to the Iowa senate.

• Under three separate proposals passed by the house, Iowans would not have to pay sales tax on toilet paper, laundry detergent, or dietary supplements.

• The Iowa House also passed a bill that will eliminate the current $90,000 net income cap. An additional bill will adjust the Iowa Child and Dependent Care Tax Credit to make it 50% refundable for Iowa taxpayers with a net income of $25,000 or above.

• House File 1027 creates a nonrefundable individual income and corporate income tax credit capped at $1,000 for the purchase of a radon mitigation system designed to reduce radon concentrations inside buildings.

Source: Des Moines Register

Montana:

0.50% Income Tax Cut signed into Law by Montana Governor

• House Bill 337 reduces the state’s top-bracket tax rate down from 5.9% to 5.4% over the next two years. It also raises the maximum threshold for the state’s lower tax bracket to $47,500 which is taxed at a 4.7% rate, and expands the Earned Income Tax Credit available to lower-income working families from 10% to 20%.

Source: Montana Free Press

Montana property tax relief passes legislature

• The relief contains a homestead exemption that taxes second homes at higher rates than primary residences. To prioritize residential homeowners, other shifts would result in higher taxes for some large businesses and utilities. The median priced-home will see savings of $719 in property taxes next year.

Source: Daily Montanan

Oklahoma:

Oklahoma House passes income tax reform, must have a procedural vote in the Oklahoma Senate before being signed by the governor.

• House Bill 1539, by state Rep. Mark Lepak and Bergstrom, would cut Oklahoma’s 4.75% personal income-tax rate by .25% each time that net state revenue increases by at least $300 million, continuing the process until the tax is completely repealed.

Source: Oklahoma Council of Public Affairs

New York:

New York Governor announces budget framework that will go to Legislature for a vote

• The full details of the legislation are yet to be accounted for but it is expected to include inflation refund checks between $200 and $400 as well as an income tax reduction of .20% for all income brackets phased in over two years. Tax credits are also supposed to rise to $1,000 dollars for each child under 4 and $500 for children ages 4-16.

Source: Record Online

Other Good Reads:

Vermont Public Radio- Vermont lawmakers struggle with how to classify vacation homes for tax purposes.

This case is particularly striking because it hinges on who bears the sales tax ownership on ecommerce platforms. Before Wayfair, the standard for sales tax collection was based on physical presence of a company in each state, which was established in Quill Corp vs North Dakota. In the case of South Carolina, Amazon established its first facility in the state in 2011, which would require the company to collect sales tax based on the standard set under Quill. However, the legislature granted a five year exemption from collecting sales tax that expired on December 31st, 2015. Beginning January 1st 2016, Amazon began to collect sales tax on some items, but not all items that were being sold by individual sellers. An investigation by the South Carolina Department of Revenue established that Amazon was liable for more than $16 million dollars in uncollected sales tax during Q1 of 2016. After the South Carolina Court of Appeals affirmed Amazon’s obligation to pay these taxes, the case advanced to the South Carolina Supreme Court, which will hear arguments in May 2025.

How South Carolina v. Amazon Ties Back to Wayfair

South Dakota vs Wayfair (2018) established that all companies must pay sales tax, overruling the standard of “physical presence” established by Quill vs North Dakota in 1992. Shortly after this ruling, all states that have sales tax passed Marketplace Facilitator laws requiring third party websites like Amazon to collect sales tax on behalf of their sellers.

The remarkable nature of the South Carolina case is that it is retroactive, and pre-dates the implementation of the Marketplace Facilitator Law. The court of appeals ruling hinges on interpretating the Marketplace Facilitator Law as “further informing” previous legislation, meaning that Amazon always had a responsibility to account for third party sellers that was neglected by the company. Amazon, or its sellers, must pay these taxes in some form because Amazon had a physical presence in the state of South Carolina, aligning with the standard set by Quill, which was still in effect at the time.

What are the implications of this case for Amazon?

The state argues that Amazon owes at least $16 million in back taxes. However, if this case is successful, that number could exceed $500 million dollars for additional sales taxes that were unpaid while the legal battle dragged on.

What are the tax implications of this case?

The effect of this case depends on how the Supreme Court rules and if Amazon is able to appeal to the US Supreme Court. As this case hinges on legislation specific to South Carolina, the impacts could be limited to just the state. In a similar case in Louisiana, the Louisiana Supreme Court ruled in 2020 that Walmart was not a “dealer” and did not need to collect sales tax prior to the Marketplace Facilitator Law being on the books.

Other states have also not rushed to collect for sales taxes that are owed prior to the facilitator laws being on the books. This is true even though some states have extended look-back periods that would make this feasible if they mounted a legal challenge similar to South Carolina. This may be due to logistical and administrative constraints facing state tax agencies. The case in South Carolina is a large undertaking and if the state Supreme Court sides with Amazon, it is unclear how South Carolina will identify and collect sales taxes from individual sellers.

Another angle to view this case is based on the Supreme Court decision in Wayfair. Given that Amazon could face over $500 million dollars in liability, they have every incentive to appeal a ruling against the company to the Supreme Court. In the opinion released by the court, there are several references to “retroactive” application of sales tax laws, and one specific passage in which a reference is made to “congress deciding” the “troubling question” of whether the new laws will have any “retroactive effect.” Is this enough for the court to take up the case? If the lower court ruling is affirmed by the high court, will other states follow South Carolina’s lead to collect sales taxes that pre-date the Marketplace facilitator laws? These questions will follow whatever happens in the Columbia courtroom next month.