Dion’s carbon tax plan

After weeks of speculation, Stephane Dion has tabled the Liberals’ carbon tax plan, dubbed The Green Shift. The plan seems heavily influenced by both BC’s carbon tax and the Mintz/Olewiler plan released in April. Tax revenues, which reach $15 billion by year four, are fully recycled into PIT and CIT cuts plus some low income measures. The tax starts at $10 per tonne and increases $10 per tonne per year to $40 in year four. But because it essentially broadens the existing gasoline excise tax, there will be no hit at the pump until year five. Clever, but I’m not sure Canadians will get the subtleties once the Tories start smearing the plan in earnest.

Like BC’s tax, the Dion carbon tax will be more symbolic of change than anything else. After all, gas prices are up an equivalent of a $270 carbon tax relative to three years ago (actually, closer to $300, since it was a month ago that I wrote that). While the current gas tax works out to $42 per tonne (which is why it will not be affected in the early years), even if that were to double, we are talking less than ten cents a litre at the pump. In other words, expect the greed of Big Oil to do most of the heavy lifting without the offsetting benefits of using the revenues to do good things.

Politics aside, I do not think full recycling of the revenues is necessary, and would rather see about half of any revenues go into public transit, energy efficiency retrofits, and a green jobs strategy, with the other half recycled back as a low-income transfer of some sort. The lack of a coherent low-income credit strategy is a major weakness of the Dion plan. Whereas in BC the low income credit is piggybacked on the GST credit, and is valued at one-third of the revenues in the first year (though declining after that), the Dion plan has a hodge-podge that includes a modest increase in the Working Income Tax Benefit, an improved Employment Credit, and (the best part) an enhanced child tax benefit. And these measures total $3.7 billion out of the $15.3 billion in year four, compared to $6.7 billion in PIT cuts and $3.8 billion in CIT cuts. There are some other low income measures in the plan but strangely they are not financed out of the new carbon tax revenues – PM Harper is sure to beat them up for spending even more than the carbon tax takes in.

Overall, too much of the recycled revenues go into tax cuts, part of the calculated politics of the plan. The economic impact of lower personal income taxes is close to nil; ditto for the corporate tax cuts, with one exception, the accelerated capital cost allowance for green investments. Besides, with Harper tabling corporate tax cuts last fall that accelerate the Liberals’ corporate tax cuts, only now to have Dion trying to out-tax-cut Harper, all makes me nauseous. I propose another revenue-neutral tax shift: raise corporate income taxes and give generous investment tax credits for emissions reductions.

On the PIT side, rates in the first bracket will fall from 15% to 13.5%; in the second, from 22% to 21%; and in the third bracket from 26% to 25%. But the third bracket only kicks in for income over about $70,000, so why exactly this rate should be cut is a mystery to me. If you acknowledge that corporate tax cuts are an upper-income tax cut in disguise, the PIT cuts only make it sweeter for those who are the most to blame for the mess we are in.

The green shift plan does include one novel item: a Green Rural Credit and higher Northern Residents Deduction. The BC plan has taken a lot of heat from rural BC, unfairly in my opinion, but a backlash nonetheless that the NDP is stoking. The additional rural amounts are not huge ($789 million in year four).

We’ll have to do some more careful modelling of how this is all distributed (Toby Sanger and I have crunched the BC numbers, the findings of which were presented at the recent CEA meetings), but the lower amounts allocated to low income measures make me wonder whether the recycling measures reinforce the regressivity of the tax rather than lean against them as the BC one does.

Will these tax cuts lead to a “double dividend” of enviromental protection while stimulating the economy, as promised? I highly doubt it. But given the positions of the Conservatives and the NDP this horse looks the prettiest to my economist’s eyes.

8 comments

  • Don Drummond TD bank economist was quoted on the National as saying Canadians would be able to calculate easily the increase in the cost of fuels, following on the Dion carbon tax, but would not be able to see the tax cut.
    How does he get away with making this type of nonsenical comment, a former ADM in Finance ?
    The tax cut comes free of anything you do, the carbon tax will depend on consumption. How are we supposed to know what we save in taxes by leaving the car in the garage. People see the personal income tax cut in the increase in after tax pay on the pay stub.
    Dale Marshal comes out strongly for the positive effects on the environment of the tax on behalf of the Suzuki Foundation,

  • Lack of detail re a carbon tariff to accompany the carbon tax is troubling, especially if the US refuses to move forward and similarly price carbon inputs in the traded sector. A one point cut to the general CIT rate – which is small and will mainly go to the banks, mining and oil and gas – would be better directed to aid to industrial adjustment outside the oil and gas sector. Auto, forestry, steel etc do not need a singificant new cost over and above the competition. I agree that more of the proceeds shoudl be recycled to effective climate change programs.

  • Michael Barkusky

    Great comment, Marc.

    I am discouraged by the position of the BC NDP under Carole James, although it may well be good tactical news for the Green Party of BC. In their haste to scoop up rural and suburban votes, the BC NDP is going to lose support from progressive urban voters who support carbon taxes in principle, and who will tolerate imperfections in the tax-equity details.

    According to a recent release by the BC NDP, they are not opposed, on principle, to any and all increase in fuel costs to reflect the higher social cost of CO2 emissions, but they are soft-pedalling this so much in their opposition to the BC tax (while Layton seems to be, once again, siding with the Tories in attempt to gore the federal Liberals, increasing the damage to the NDP brand) that environmental progressives are going to have a hard time voting for NDP candidates, provincially or federally.

    But if this leads to a Green Part of BC breakthrough in the May 2009 BC election, the BC NDP might find themselves in opposition yet again and may have to negotiate an electoral alliance with the GPBC for the subsequent election, to prevent the BC Liberals getting a fourth mandate !

  • Here’s my reaction for SG:

    Dion’s plan privatizes climate change fight with Conservative-style tax handouts
    Strategy is more about politics than pollution

    by Ish Theilheimer

    Stéphane Dion unveiled a carbon tax plan yesterday that is more about politics than about
    pollution. It is based on a hopeful political calculus aimed at picking up voters “parked”
    with the Green Party and green NDPers sick of the Harper regime. Ironically, it claims to
    fight climate change with that most Conservative of notions – a tax cut that will help
    corporations (especially oil companies and banks) and wealthy people most.

    The plan has some merit in taxing pollution, although the kind of cap-and-trade system
    the NDP has proposed – which may be equally inscrutable to voters – could produce more
    dramatic results than the Liberal approach, with its quite marginal levels of tax shifts.
    What the Liberal plan does with the money, however, is the problem.

    Instead of ploughing the money into public transit, technological innovation, subsidies
    and low-interest loans to retrofit homes and factories, it offers tax cuts. As with most tax
    cuts, the main beneficiaries are upper-income earners and profitable corporations. And
    the most profitable corporations are banks and oil companies.

    Dion claims that a $20,000 earner will see a $1,400 tax reduction. A professional earning
    $150,000 will see a $1,500 reduction due to the one percent cut for that bracket. A
    $200,000 earner will get a $2,000 break, and a corporation like the Royal Bank, which
    earned 5.5 billion dollars in profit will get $55 million.

    He promised to “bring forward a package that will include assistance for home retrofits,
    increased efficiency standards for appliances, higher fuel efficiency for cars and trucks,
    increased renewable power sources, incentives for the farm and forestry for carbon sinks,
    investments in green infrastructure and public transit, and incentives for the scrappage of
    old and inefficient cars.”

    Regulatory changes of the sort he lists are sensible and cheap for government to
    implement. Incentives and investments are not, and the plan announced this week uses up
    a great deal of fiscal room. By committing himself to corporate and personal tax cuts,
    Dion cuts himself off from being able to raise money to build the fleets of subways, trains
    and buses we’ll need. Without borrowing from somewhere, he’ll be hard-pressed to
    finance energy retrofits and innovation funds. It may be possible to provide incentives to
    harness the power of pension funds for some of this work, but even this will cost the
    government money it does not have, thanks to this week’s tax cut promises.

    The other great weakness of Dion’s plan is that it shifts the burden of fighting climate
    change away from the public sector and government and onto the shoulders of
    individuals. Are low-income Canadians going to be able to afford to invest in high-
    efficiency furnaces and solar collectors just because their taxes go down about a hundred
    bucks a month when all other costs are going up? (This question is especially troubling
    for non-tax filers, who won’t see any credits issued to them at all.) And will Dion’s “tax
    shift” truly be revenue-neutral when the new taxes affect the price of nearly everything
    people buy?

    Neither seems likely.

    Of course, individual Canadians want to help save the planet, and there are many useful
    things they can do. This plan, however, leaves the onus on them, continuing the
    abdication of federal responsibility that has been going on for years and accelerated under
    Harper.

    Dion’s belief that, as a result of these tax cuts, “we will see solutions emerge from across
    the economy” is the kind of corporate doublespeak we have come to associate with
    leaders like Stephen Harper, Gordon Campbell, and Mike Harris. From the railroad to
    public education to the Internet, governments have invested in technological, social and
    economic advances. The Liberal plan appears to abandon that tradition in favour of a
    privatized plan to fight climate change.

    Through all this, Dion’s strength is his positivity and sense of mission. You can’t counter
    that with nit-picking. If the main objective of the plan is to harvest NDP votes, Jack
    Layton will need big ideas and resonant plan of his own. The NDP favours a cap-and-
    trade system, which levies heavy fees onto polluters, which pay companies who purchase
    carbon credits by offering environmentally beneficial products and servicess.

    Although Layton’s plan has something to offer – as does Dion’s – just talking about
    capping emissions is negative, technocratic jargon, and may be hard to explain or sell to
    Harper-weary Canadians. And it too is privately oriented – bad companies paying good
    companies to do good. To counter the positive messages Dion and the Liberals are
    projecting based on individuals and companies shouldering the load, the NDP will need
    something even more positive, based on public values, investment and leadership.
    Harnessing the investment clout of government must be a big part of the answer. And at
    the top of the agenda must appear the words “Green Jobs.”

    In the meantime, Stéphane Dion has commanded attention with his daring initiative.
    It remains to be seen what ordinary Canadians make of it and whether he has plans, as
    well, for the federal leadership and investment so badly needed to fight climate change, or
    if the whole thing is really just politics.

  • It would be nice to see some leadership and a comprehensive action plan. We need some broad strokes of green across much of the socio- economic landscape. If the Green shift is to hit us, as the liberals say then we need some serious commitments in terms of investment and spending. The investments needed to transforma nd make the adjustments are far more encompassing that a consumption tax. We need to get over the carbon tax as some kind of panacea, as it is most likely the one that leaves the worst taste in the mouth of voters as it sits squarely on their shoulders.

    The party that wants to win the green vote that is seemingly pervasive and indeed legitimate, will be won by a sound comprehensive plan that ties the economic calls for industrial renewal (not on the backs of workers like GMs latest Oshawa display of corporate climate change plans) with the comprehensive needs of the future.

    Massive government spending is what I say is needed. Open up the wallet, at least if the future has got to pay for something and be saddled with burdensome debt, if we spend it on required greening, at least they will not be as upset at us. Spend it now before the right wngers of the world spend it on another war, or combating climate change from an unimaginable and costly eye of the climate change storm.

    Spend spend spend spend, and spend now, before we are not allowed to spend cause there is no economy left to even contemplate such a notion as debts, deficits and simple things like predictable weather.

    Alarmists need to be heard!! and listened to in more alarming ways than ever?!

    Seriously why can’t we spend our way into the green? Why is nobody on the progressive side speaking more on such a topic. Given the winds of change in the economy I would have thought this path would be well beaten by now. Shat the clearing hasn’t even begun yet. Come on people get off the carbon tax band wagon and lets create our own ride. There are plenty of horses in the barn, why do we need to ride that same old tired horse.

    paul

  • “I do not think full recycling of the revenues is necessary…”

    In an ideal world i would agree with you, but selling Canadians a revenue neutral carbon tax is hard enough, selling Canadians a tax increase would be nearly impossible.

  • The first para or two of Ish’s comment says it all.

    After that, it’s all about some persnickity percentages of corporate and private giveaways.

    Who gives a crap?

    Does the carbon tax have have an ecological or environmental purpose?

    If so, HOW does it accomplish that purpose if all you do is give it back to those who paid it in the first place.

    The purpose of the tax should be neither punitive nor political, and it should serve neither of these ends.

    Its purpose should be revenue-generation in support of public policy.
    It should support a public policy that we have agreed needs the monies in order to be accomplished.
    We need to say where the revenues would be used to meet our carbon-causing calamities.

    All this tax-and-giveaway and tax-and-divided stuff is not worth the server space we are giving it.

    Carbon Tax Now.
    Solving carbon-caused climate change NOW.

    peepeedicking around a bunch of political chicanery wastes our time.

  • I would take the revenues and split them in half, with one half going to a credit modeled along the lines of the OAS or CCTB, where there is a higher cut-off poing and a long tail so that most people get something, just not the most wealthy. We need to do this to offset the regressive impact of the tax.

    It does seem odd to give money back. The key point is that it makes the cost of using fossil fuels high, on the margin.

    I see no need for personal or coporate income tax cuts. These are part of a (bad) political calculus to make the tax more acceptable.

    The other half I would put into public transit expansion and lower fares, energy efficiency retrofits for low income people and renters, and just transition programs for workers.

    Interestingly, this plan looks a lot like the CCPA’s Alternative Federal Budget. 🙂

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