Is BC’s Carbon Tax Fair?
The CCPA released today a new study by myself and Toby Sanger on the distribution of BC’s carbon tax and recycling regime. I’ve probably leaked most of the findings in various blog posts in recent months, but the full meal deal is now available for download here. Toby and I modeled the carbon tax by quintile based on household survey data, then looked at the distribution of the recycling regime of personal and corporate tax cuts and a new low-income credit that piggybacks on the GST credit. We looked forward to see how the regime changes over time, and modeled some alternative credit schemes.
Below is an oped I wrote for the Vancouver Sun that gives a synopsis of what we found and our recommendations to the provincial government:
By Marc Lee
Introducing a new tax is never a popular political move, so it was notable when the BC Liberal government, known more for its tax cutting, brought in Canadaâ€™s first broad-based carbon tax in Februaryâ€™s budget.
In politics, timing is everything. Between Feb. 19, when the BC Budget tabled the carbon tax, and July 1, when it was implemented, prices at the pump rose to record levels. At the start of July, Vancouver gas prices peaked at more than $1.50 per litre, about 40 cents higher than at budget time. The carbon tax counted for a mere 2.3 cents per litre of that increase, but quickly became a lightening rod for public anger about higher fuel prices.
Now that gas prices have come back down, it is a good time to revisit the carbon tax and how it affects different households in BC. It is important to get the details right because the carbon tax is supposed to steadily increase over time, and will eventually have major impacts on both household and provincial budgets.
As with sales or consumption taxes, lower-income households will feel the impact of carbon taxes more intensely. On its own, BCâ€™s carbon tax is regressive, meaning low-income families pay a larger share of their income to the tax than high-income families (even though high-income families will pay more in straight dollars).
But distribution is also affected by how the proceeds of the tax are recycled back to households in the form of personal and corporate income tax cuts and a new low-income tax credit. This revenue recycling turns a regressive tax into a progressive outcome â€“ at least for the first year.
In 2008/09, the overall carbon tax regime delivers a modest net gain in dollar terms for the bottom two-fifths of households (about $40 per household on average, or 0.2% of income). These amounts are relatively small because the carbon tax starts out at such a low rate.
A major concern looking forward, however, is that the low-income credit is not scheduled to grow in line with the carbon tax. The credit of $100 per adult will grow to $105 as of July 2009, and no further increases are scheduled. But the carbon tax itself will grow by 50% as of July, and will continue to rise in future years.
This means the progressive outcome in 2008/09 disappears next year, and as of 2010/11 the carbon tax regime becomes regressive â€“ and more so with each passing year.
This problem is relatively easy to fix. The 2009 BC Budget should commit that the low-income credit will grow in line with carbon tax revenues. Indeed, because low-income families need real options for taking climate-friendly actions, the credit could be increased much more. Currently, one-third of total carbon tax revenues is used to finance the low-income credit. If this was increased to one-half of revenues, the net gain in 2009/10 for the bottom 20% would be $125 on average (or 0.8% of income).
A second concern with the carbon tax regime is that tax cuts undermine a progressive outcome at the top of the income scale. In 2008/09, personal and corporate income tax cuts lead to an average net gain for the top 20% of households that is larger in dollar terms than for the bottom 40%.
This problem will get worse in future years, and is a perverse outcome since top earners tend to have the largest carbon footprints. Personal and corporate income tax cuts should thus be dropped, and the remaining carbon tax revenues should fund other programs to reduce BCâ€™s greenhouse gas emissions, including major public transit expansion, transition programs for workers, and energy efficiency programs.
Taking global warming seriously means accepting higher prices for activities that emit greenhouse gases. Carbon taxes, as well as cap-and-trade systems and regulations on industry, will all lead to higher prices that will adversely affect low-income households. One of the main benefits of a carbon tax is that revenues come in to the government, which can use them to offset those regressive impacts.
A basic principle of fairness is that families with low or modest incomes should be no worse off under any carbon pricing system. BCâ€™s carbon tax and recycling regime is a good first step, but the 2009 budget must correct some design flaws to ensure that the carbon tax regime does not worsen inequality.