The death of the carbon tax revenue neutrality myth

The death of the carbon tax revenue neutrality myth

Without B.C.’s revenue-neutral tax as a template, other provinces are free to indulge in foolish green fund spending orgies

By Peter Shawn Taylor
Canadians for Affordable Energy

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.

Some history first. Revenue neutrality was integral to Stephane Dion’s controversial Green Shift proposal, which was released prior to the 2008 federal election. The then-federal Liberal leader claimed his $15-billion-a-year carbon tax plan would “put every single penny back into the hands of Canadians” through reductions in income taxes, and increases in child tax benefits and Guaranteed Income Supplements for seniors.

Dion never got a chance to prove he meant what he said, losing the 2008 federal election to Stephen Harper’s Conservatives.

But later that year, B.C. unveiled its carbon tax, with an identical 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 give-back 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.”

And revenue neutrality was the inspiration behind former Conservative Party leadership candidate Michael Chong’s carbon tax platform.

Whatever your thoughts on climate change, advocates propounded, revenue neutrality is transparent, efficient and fair to taxpayers. 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 politically-motivated 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.

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