The death of the carbon tax revenue neutrality myth
The dream of a revenue-neutral carbon tax is over.
The notion of carbon tax perfection has always centred on revenue neutrality − whatever governments reaped by taxing carbon dioxide emissions would be returned to taxpayers via tax cuts in other areas. In this way, the overall cost of climate change policy would be nil. Taxpayers would be kept whole.
Unfortunately, British Columbia’s recent provincial budget proves such a textbook utopia can’t survive exposure to the political realm.
B.C. unveiled its carbon tax in 2008 with this commitment. “This carbon tax will be entirely revenue neutral,” the 2008 B.C. budget speech solemnly vowed. “Every dollar raised will be returned to the people of B.C. in the form of lower taxes.” Any pain felt by higher gas prices, for example, would be compensated for by tax cuts elsewhere. This promise was enshrined in law.
In the first few years of its tax, the B.C. government appeared so keen on its neutrality promise that it handed back more than it collected. That first year saw $307 million collected and $315 million given back in tax cuts. The following year, the net giveback was more than $180 million.
B.C.’s commitment to carbon tax neutrality has since been promoted as a target for all other jurisdictions. Canada’s prominent EcoFiscal Commission heaped praise on B.C. in its first report. An academic study by the Nicholas Institute for Environmental Policy Solutions at Duke University called B.C.’s carbon tax a “textbook policy.”
Whatever your thoughts on climate change, advocates propounded, revenue neutrality is transparent, efficient and fair. And B.C. proved the point.
Under B.C. Liberal Premier Christy Clark, however, the strict definition of revenue neutrality slowly faded. While personal and corporate income taxes comprised almost all compensatory cuts in the first few years, over time the B.C. government started to claim cuts in obscure and politicallymotivated areas. Film tax credits, always a dubious proposition from a taxpayer’s perspective, eventually became a major source of carbon tax compensation. So did tax breaks for “interactive digital media.”
A Fraser Institute report earlier this year pointed out many of the alleged tax reductions were from credits that existed prior to being claimed as carbon tax relief, or that should otherwise be considered ineligible. According to the report, B.C.’s carbon tax ceased to be appropriately revenue neutral in the 2013-14 budget year. Now, with the ascension of the NDP/Green party government in Victoria, all pretense to revenue neutrality has been dropped.
The recent provincial budget not only makes plans to hike the carbon tax by two-thirds — rising from $30 a tonne to $50 a tonne by 2021 − but eliminates the legal requirement for offsetting tax cuts. The government of Premier John Horgan plans to use its carbon tax windfall to “create jobs, benefit communities and reduce climate pollution.” In other words, all the things governments already spend your tax dollars on.
B.C. taxpayers have become the victims of a grand deception. The carbon tax introduced on the solemn promise of strict revenue neutrality has been turned into just another government tax grab. That’s a betrayal.
Such duplicity has significance outside B.C. Clearly any reference to implementing a “textbook” carbon tax must now be dismissed as idealism. The ideal of revenue neutrality is no match for the eager hands of political opportunism. Giving the money directly back to taxpayers never had a chance in the long run.
And without B.C.’s gold standard revenue-neutral tax as a template, other provinces are free to indulge in green fund spending orgies − rewarding favoured industries, handing out foolish energy subsidies and otherwise bolstering their re-election chances — without fear of any troublesome counter-arguments.
However governments decide to price carbon dioxide emissions − via a direct tax or an indirect cap-and-trade system — it’s just another efficiency-reducing, growth-stifling, wallet-shrinking tax.