B.C.’s budget—an opportunity to make the carbon tax revenue neutral again

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Appeared in the Vancouver Sun, February 20, 2017

This week the B.C. government will release its budget, and if last week’s Throne Speech is any indication, tax cuts may be on the way. This is welcome news, since it’s an opportunity for the government to correct a problem with its allegedly revenue neutral carbon tax.

This is the same carbon tax the government trumpeted in the Throne Speech and recently called “a truly revenue-neutral tax—not an opportunistic reach into taxpayers’ wallets.”

But in reality, B.C.’s carbon tax is no longer revenue neutral and has actually become a net tax increase on British Columbians.

A carbon tax raises the cost of consuming carbon-emitting goods. In B.C.’s case, it means residents pay more to heat their homes, fuel their cars, and produce and transport various goods. When the B.C. government enacted the policy back in 2008, it promised to make the carbon tax revenue neutral, offsetting any new revenue from the carbon tax with new tax cuts to ensure there’s no net tax increase.

Initially in 2008/09, the government kept its promise—the carbon tax was revenue neutral. 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. In other words, the government cut other taxes to roughly equal the new revenue from the carbon tax so that the province did not collect any additional revenue from taxpayers.

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

The Fraser Institute recently published a study demonstrating this. In response, B.C. Finance Minister Mike de Jong told the Canadian Press that his government looks at the “entire tax system every year as part of the budget process, and it's reasonable that deciding to continue providing a tax cut is as legitimate a tax measure to include as an entirely new tax reduction.”

Believe it or not, that’s actually what the government is doing. It’s taking tax credits—de Jong’s “tax measures”—that were implemented upwards of 15 years ago and claiming them as offsets to the carbon tax.

In fact, a number of the tax credits his government now counts as offsets were first introduced in the 1990s—well before their inclusion in the government’s revenue neutral calculation. This includes two tax credits for the film industry (first introduced in 1998) and a tax credit for research and development (first introduced in 1999). Other pre-existing measures include tax credits for the video game industry and apprenticeship training.

Once the pre-existing tax reductions, are properly removed from the government’s revenue neutral calculation, B.C. taxpayers endured a net tax increase of $226 million in 2013/14 and $151 million in 2014/15, as a result of the carbon tax.

If the available historical data (noted above) are combined with the government’s projections to 2018/19, then the carbon tax is projected to result in a cumulative $865 million net tax increase on British Columbians over a six-year period.

But that’s not all. There’s also a problem with the type of tax reductions the government now uses to offset the carbon tax revenue. Although initially providing mostly broad-based relief to individuals and businesses, the mix of tax reductions has increasingly shifted to boutique tax credits targeted at specific groups.

Why does this matter?

Because targeted tax credits do virtually nothing to improve incentives and foster economic activity. Economists generally agree that, in order to truly mitigate the adverse effect of the carbon tax on the economy, ideal tax reductions should come from broad-based rate cuts to economically damaging taxes such as personal and corporate income taxes.

The Throne Speech said the upcoming budget would provide “financial relief to taxpayers.” A worthy place to start is making good on the promise to make the carbon tax revenue neutral.

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