British Columbia’s not-so-revenue-neutral carbon tax

BCBC agrees with Fraser Institute: carbon tax has cost the province’s taxpayers $377 million

B.C. Finance Minister Mike de Jong pulled an end-run last week on criticisms of how it offsets carbon tax when he introduced tax cuts that will more than offset revenue from carbon tax.

When it comes to B.C.’s revenue-neutral carbon tax, the B.C. government and the Fraser Institute at least agree on one thing: it’s not revenue neutral.

The B.C. government claims it is, in fact, revenue negative because the amount of tax reductions it offers actually exceeds the amount of money brought in through the $30 per tonne carbon tax.

Last year, the reductions exceeded carbon tax revenue by $500 million, according to the Ministry of Finance.

“Since the carbon tax was established in 2008-09, it has returned over $1.6 billion more in tax cuts to B.C. employers, individuals and families than it has raised for government,” Sonja Zoeller, senior public affairs officer with the ministry, said in an email to Business in Vancouver.

But a recent Fraser Institute analysis concludes that the carbon tax was indeed revenue neutral for its first five years, but ceased being so in 2013.

That’s when the government hiked corporate tax rates and then started factoring in old pre-existing tax credits to make it look as if the carbon tax were still being offset, as revenue from the tax continued to increase, despite being frozen at $30 per tonne since 2013.

The pre-existing tax credits have included the film and TV tax credit and the scientific research and experimental development credit. When they are removed from the calculation, the carbon tax has actually cost British Columbians an additional $377 million over two fiscal years, concludes Charles Lammam, the Fraser Institute’s director of fiscal studies.

“They promised British Columbians that this would not be a net increase of taxes, and it has been,” Lammam said. “So they have broken a promise they made to British Columbians.”

Jock Finlayson, chief policy officer for the Business Council of BC, agrees with the Fraser Institute’s assessment.

“They presumably did this in an effort to persuade the business community that the carbon tax has not increased overall costs for companies operating in B.C.,” Finlayson said. “But for the vast majority of firms in B.C., the truth is that the carbon tax has increased the aggregate cost of doing business in B.C.”

Nancy Olewiler, who was a member of the government’s Climate Leadership Team, also agrees that the pre-existing tax credits should not be calculated as offsets to the carbon tax.

“This is one of those occasions where I agree with the Fraser Institute,” said Olewiler, director of the School of Public Policy at Simon Fraser University.

“I may not agree with what their conclusion is, but certainly the inclusion of all those tax credits, which really has nothing to do with greenhouse gases or climate change ... those aren’t really tax cuts. Those are what we call, in economics, tax expenditures. They’re subsidies.”

B.C. is the only jurisdiction in North America to have introduced a revenue-neutral carbon tax. It has been held up as the gold standard for carbon pricing.

The idea behind carbon pricing isn’t necessarily to raise additional revenue for governments, but to place a financial disincentive on activities that generate carbon dioxide.

To mitigate any unintended curbs on the economy, B.C. made its carbon tax revenue neutral. By law, the province is required to offset whatever revenue the tax generates with tax decreases and tax credits elsewhere – income and sales taxes, for example.

For example, when the carbon tax was introduced, it knocked 2% off the two lowest income tax brackets and cut corporate income taxes by 1%. And for the tax’s first five years, it was revenue neutral.

But in 2013, the government hiked the corporate tax rate to 11% from 10%. Instead of introducing new tax breaks elsewhere, it began to calculate tax credits that had been in place for years. Some of the tax credits it now calculates predate the carbon tax by 15 years, Lammam said.

When those pre-existing credits are removed from the calculations, Lammam said, the carbon tax has cost British Columbians an additional $377 million.

Lammam is particularly puzzled by the film and TV tax credits being included as an offset to the carbon tax.

“This is not a carbon-intensive industry,” he said. “There’s really no economic rationale for why the government would use any of the tax offset for this industry.”

On February 21, Finance Minister Mike de Jong addressed the concerns raised by the Fraser Institute and pulled what might have been an end run on its criticisms.

De Jong pointed out that the film and TV tax credit is no longer part of the calculation for the 2017-18 budget. Moreover, the halving of the provincial sales tax on power sales and reductions to Medical Services Plan (MSP) premiums can now be calculated as an offsetting tax reduction.

“I think the reductions in the MSP … renders that debate moot,” de Jong said. “Clearly there have been tax reductions that far exceed – or exceed, at least – the carbon tax.”