Unravelling the carbon tax

By Charles Lammam and Taylor Jackson

In a major announcement last year, the Trudeau government imposed a policy that will require all provinces to put a price on carbon emissions by 2018.

As governments in Canada and elsewhere pursue carbon pricing, British Columbia's carbon tax has received global praise as the gold standard. 

Both the United Nations and World Bank have declared B.C.'s "revenue neutral" carbon tax the model to follow. The OECD called it a "textbook" example of how to implement carbon pricing. Commentators in Canada and the U.S have similarly hyped B.C.'s carbon tax, arguing it's proof that governments can get carbon policy right.

One of the underlying reasons for all this praise is the alleged revenue neutrality of the tax. That simply means any new revenue from the tax is offset with new tax cuts to ensure there's no net tax increase from the policy.

But there's a fundamental problem with the B.C. model. Despite what the government claims, B.C.'s carbon tax is not actually revenue neutral. 

When the province first introduced the tax, it promised revenue neutrality. And initially it was. To offset the new revenue, the government introduced new cuts to personal and business tax rates and a new tax credit for low-income earners. The value of these tax reductions was enough to offset the revenue generated.

However, five years later, as carbon tax revenue increased, the government no longer provided new tax cuts that sufficiently offset the revenue. In other words, B.C.'s carbon tax ceased being revenue neutral in 2013-14.

This is contrary to what the B.C. government reports in its official documents. The problem is that by 2013-14, the province was no longer solely relying on new tax reductions to offset carbon tax revenue and instead began using pre-existing tax credits to give the appearance of neutrality. 

In fact, a number of the tax credits now counted as offsets were first introduced in the 1990s – well before their inclusion in the revenue neutral calculation.

Once the pre-existing tax reductions are properly removed from the calculation, taxpayers endured a net tax increase of $226 million in 2013-14 and $151 million in 2014-15. Those numbers are based on historical data.

According to data from the government's own projections, the carbon tax will result in a cumulative $865 million tax increase on British Columbians between 2013-14 and 2018-19. So much for revenue neutrality.

But the problems don't end there. Like all taxes, a carbon tax imposes economic costs beyond the amount of money the tax raises, as people change their behaviour in ways that reduce economic output.

While an increasing share of carbon tax revenue is being offset with targeted tax credits for specific individuals and businesses, these types of tax measures do virtually nothing to mitigate the economic costs of the carbon tax.

Once political realities set in, the textbook theory of a revenue neutral carbon tax unravels. 

Charles Lammam and Taylor Jackson are co-authors of the Fraser Institute study Examining the Revenue Neutrality of British Columbia's Carbon Tax.

– Troy Media