A revenue negative carbon tax?

BC’s carbon tax was supposed to be “revenue neutral”, meaning all carbon tax revenue would be “recycled” to British Columbians through personal income tax cuts, corporate income tax cuts and a low-income credit. When the 2008 budget launched the carbon tax, we were provided with a forecast that had revenues precisely match recycling through tax cuts and credits, with about one-third of revenues going to each of PIT cuts, CIT cuts and the low-income credit.

But recent budgets have shown a carbon tax deficit: tax cuts have completely swamped carbon tax revenues. While some were concerned that the carbon tax would be a “tax grab”, instead we are a carbon tax is that is revenue negative not revenue neutral.

In the tax’s first year, the result is not too bad: projected revenues of $338 million came in much less than expected at $306 million, due to the recession the government completely failed to see coming. But for the same reason, tax revenues fell and so did the value of the personal and corporate tax cuts, at $313 million. This modest shortfall is arguably within the margin of error given that this was a brand new tax.

But the carbon tax deficit swelled in 2009/10. Carbon tax revenues were $542 million, while tax cuts and credits cost $767 million, a deficit of $225 million on the carbon account (detailed on p. 105 of the 2010 budget plan). For a government concerned about its deficit, and that has imposed massive spending restraint on the public sector, a commitment to tax cuts that far exceed carbon tax revenues is bizarre. One can make the argument that tax cuts should be part of a stimulative fiscal policy (although their effectiveness is generally weak), but that is a very different from the rationale for a revenue neutral carbon tax.

Looking forward, budget projections show that the trend of deficits on the carbon account continues for the duration of the three-year fiscal plan. In response, the budget does not scale back tax cuts. The general corporate income tax rate having fallen from 12% in the first half of 2008 to 10.5% in 2010, will drop another half-point to 10% in 2011. And it is not like BC businesses have not already received tax cuts (hello, HST).

Corporate tax cuts are now absorbing the lion’s share of carbon tax revenues. In 2010/11, they will be equivalent to 57% of carbon tax revenues, compared to one-third in 2008/09. Cutting corporate taxes is the worst possible way of using carbon tax revenues. This is because of the intense concentration of ownership of capital at the top of the income distribution (when you hear corporate tax cuts think upper-income tax cuts), and also because shareholders outside BC, who pay no carbon tax, benefit from corporate tax cuts. While it might make sense to provide tax credits for investments in energy efficiency, corporate tax cuts essentially reward the worst offenders when it comes to greenhouse gas emissions.

A final note: the 2010 budget provides for an increase in the low-income credit as of July 2011 (in a previous post I mistakenly reported this as occurring in 2010) to $115.50 per adult and $34.50 per child. That will represent an increase of 15.5% in the value of the credit since the carbon tax was introduced in July 2008. Meanwhile the tax itself will be 150% higher as of July 2011. The result is an increasingly regressive carbon tax and revenue recycling regime.

Topics: Climate change & energy policy, Provincial budget & finance, Taxes