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 â€“ 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.