Restructuring BC's revenue neutral carbon tax (2015)
While the Chamber recognises that the Provincial Government has maintained the revenue neutrality of the carbon tax we have become increasingly concerned over the tax measures introduced to return the funds to British Columbians. Since the carbon tax was introduced we have seen the tax measures move from broad based personal and corporate tax cuts to a range of niche, targeted tax credits. This is undermining the effectiveness of the carbon tax as a tax shift measure and is undermining support for the tax by limiting the savings British Columbians should be seeing in terms of reduced tax burden.
At the time of its introduction the Chamber network was generally supportive of the carbon tax. While members expressed concern over regional impacts and the erosion of competitiveness for certain sectors there was a recognition that climate change must be addressed and the most efficient and effective way to do that was to place a price on carbon.
The Chamber has been consistent, government must work with sectors that can demonstrate a negative economic impact to mitigate impacts where appropriate. The Chamber has therefore been pleased to see the Provincial Government react in a positive manner to sectors that have identified significant challenges with the B.C. carbon tax.
Government’s ongoing efforts to mitigate impacts, when combined with the increasing evidence that the carbon tax is having a significant impact on reducing B.C.’s greenhouse gas emissions (GHG’s), are increasingly recognised around the world as establishing B.C. as a global leader in addressing climate change through the effective utilisation of market mechanisms.
However, the integrity of B.C.’s Carbon Tax is being undermined by the erosion of its revenue neutrality. Our members were very clear, the carbon tax could not become a slush fund for program spending. In this regard we were pleased to see that revenue neutrality was enshrined in legislation. The power of the carbon tax is that it represents a tax shift that incents individual and businesses to change their behaviour. While the public are receptive to using carbon tax revenue for initiatives that are intended to reduce our greenhouse gas (GHG) emissions the chamber believes this is a dangerous concept.
The Chamber congratulates the government for continuing to oppose the use of carbon tax revenue for program spending, no matter how worthwhile the cause. Whether it is calls for carbon tax revenue to be used for investment in green or emerging technologies, or the calls by the Mayors Council to use the carbon revenue generated in the Lower Mainland for Translink funding the Chamber continues to oppose these calls for a very simple reason.
The reality is that governments across the world have shown themselves to be poor judges of which programs or investments will actually result in a long terms reduction in our GHG emissions. While the price signal of a carbon tax has been highly effective at shifting consumption patterns governments’ record at investing these funds have a far less successful track record.
Irrespective of governments ability to invest these funds in a manner that creates new economic opportunity, or to pick winners in global markets, the biggest concern is that evidence shows that the one outcome we can be certain of when it comes to taxes earmarked for program funding is that they will increase.
While the government has maintained the principle of revenue neutrality business has watched with growing concern the expansion of credits and tax cuts introduced under the auspices of revenue neutrality.
If we look at the initial allocation of carbon tax revenue when the tax was introduced in 2008 we see that the number of measures were limited in scope and were directed specifically as broad tax cuts for business and individuals.
This structure of tax reductions was supported by the chamber network as the carbon tax was intended to represent a tax shift. Given that the carbon tax is paid by most British Columbians it is only right that most British Columbians should benefit from the tax measures that result.
Revenue was generated through a tax on consumption generated by the production of GHG’s – a societal negative. These revenues were then returned to British Columbians in the form of a reduction in taxes that were detrimental to economic growth – personal and corporate income tax.
While the Chamber congratulates the government for maintaining the revenue neutrality of the tax an examination of the current tax measures shows a serious shift from the original approach.
Currently the Provincial Government has identified items to be eligible for funding by Carbon Tax revenue and has defined such funding as “designated tax measures”. Even the nomenclature signals a shift in governments approach. On the introduction of the carbon tax the items were clearly listed as tax cuts, now they are designated as tax measures.
When the carbon tax was introduction in 2008 we saw personal tax measures representing 100% of the revenue neutrality measures. If we look at the situation today we see that broad based tax cuts represents just 38%!
In the case of business we saw corporate tax reductions also representing 100% of the tax measures in 2008. Today business tax reductions represent just 46% of B.C.’s revenue neutrality.
We recognise that the other measures do represent a reduction in the tax load borne by business and the individual. However when we look at the recipients of these credits we see a worrying trend towards allocating tax credits to niche interests. Such designated tax measures include the Senior Home Renovation Credit and the Children’s Art Credit, and an increase to the small business venture capital tax credit. While these designated tax measures may be important to the groups that receive them (indeed, several have been supported by the Chamber), many create little or no benefit to the provincial economy and many are questionable as to whether they result in a shift in behaviour, or provide an incremental increase in revenue for the government.
To put this into context, if the original focus on broad based tax cuts were maintained we would have had an additional $106 million available for broad based personal income tax cuts and an incredible $463 million available for broad based tax cuts for business in 2014/15.
This shift is made even more challenging by the fact that when government was struggling to achieve a balanced budget the primary revenue mechanism utilised was to increase B.C.’s corporate and personal tax rates. This was done while maintaining the full range of designated tax measures introduced under the carbon tax.
The Chamber is a strong supporter of balanced budgets and recognises that a shift in tax reductions under the carbon tax would mean the elimination of some tax measures, or would be required to come from general revenue. In this regard the Chamber believes government must review the tax credits under the carbon tax to determine their effectiveness. If the credit is unable to demonstrate that it has driven a shift of behaviour then that credit must be phased out quickly. If the credit can be shown to have had a positive outcome then government must transition the credit out of the carbon tax and fund the credit from general revenue.
The Chamber believes that while the carbon tax appears to be a contributing factor to a reduction in B.C.’s GHG emissions the tax is being undermined by the fact that the majority of people paying the tax are no longer seeing the benefit in terms of a reduced tax burden. This is occurring while business, particularly our critical export industries, continue to have their competitiveness undermined by a tax that none of their competitors are subject to.
THE CHAMBER RECOMMENDS
That the Provincial Government;
introduce no new tax credits under the auspices of the revenue neutral carbon tax;
begin a process to return the revenue neutrality measures of the carbon tax to broad based reductions in B.C.’s personal and business taxes; and
continue to review the Carbon Tax to improve fairness and reduce adverse economic impacts
 http://www.B.C.budget.gov.B.C..ca/2008/bfp/2008_Budget_Fiscal_Plan.pdf, page 15. It should be noted that the $100 Climate Action Dividend was separate from, and in addition to, these tax reductions
 It should be noted that a significant portion of the designated tax measures in 2008 was $194 million provided through a low income climate action tax credit. While not a broad based tax cut the Chamber recognises that this represents broad based tax relief as many individuals do not pay income tax the only way to provide benefit to low income individuals is through a tax credit.