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B.C.’s carbon tax: Revenue neutrality couldn’t survive exposure to politics

Peter Shawn Taylor is a journalist, policy research analyst and contributor to Canadians for Affordable Energy.

The dream of a revenue-neutral carbon tax is over.

The notion of carbon tax perfection has always centred on revenue neutrality − whatever governments reaped by taxing carbon dioxide emissions would be returned to taxpayers via tax cuts in other areas. In this way the overall cost of climate change policy would be nil. Taxpayers would be kept whole. Unfortunately, the recent provincial budget in British Columbia proves such a textbook idyll can not survive exposure to the political realm.

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Some history first: Revenue neutrality was integral to Stéphane Dion's controversial Green Shift proposal, released before the 2008 federal election. The former federal Liberal leader claimed his $15-billion-a-year carbon tax plan would "put every single penny back into the hands of Canadians" through reductions in income taxes, as well as increases in child tax benefits and Guaranteed Income Supplements for seniors.

Mr. Dion never got a chance to prove he meant what he said but, later that same year, B.C. unveiled a carbon tax of its own with an identical commitment. "This carbon tax will be entirely revenue neutral," the 2008 budget speech solemnly vowed. "Every dollar raised will be returned to the people of B.C. in the form of lower taxes." Any pain felt by higher gas prices, for example, would be compensated for by tax cuts elsewhere. This promise was enshrined in law.

In the first few years of its tax, the B.C. government appeared so keen on its neutrality promise that it handed back more than it collected. That first year saw $307-million collected, and $315-million given back in tax cuts. The following year, the net give-back was over $180-million.

B.C.'s commitment to carbon tax neutrality has since been promoted as an aspirational target for all other jurisdictions. The Montreal-based Ecofiscal Commission heaped praise on B.C. in its very first report. An academic study by the Nicholas Institute for Environmental Policy Solutions at Duke University called B.C.'s carbon tax a "textbook policy." Revenue neutrality was similarly the inspiration behind former Conservative Party leadership candidate Michael Chong's own carbon tax platform. Whatever your thoughts on climate change, advocates propounded, revenue neutrality is transparent, efficient and fair to taxpayers. And B.C. proved their point.

Under B.C. Liberal Premier Christy Clark, however, the strict definition of revenue neutrality slowly faded. While personal and corporate income taxes comprised almost all compensatory cuts in the first few years, over time the B.C. government started to claim cuts in obscure and politically motivated areas. Film tax credits, always a dubious proposition from a taxpayers' perspective, eventually became a major source of carbon tax compensation. As did tax breaks for "interactive digital media."

A Fraser Institute report earlier this year points out many of the alleged tax reductions were from credits that existed before being claimed as carbon tax relief, or that should otherwise be considered ineligible. By their calculations, B.C.'s carbon tax ceased to be appropriately revenue neutral in the 2013-14 budget year. Now, with the ascension of the NDP-Green Party government in Victoria, all pretense to revenue neutrality has been dropped.

The recent provincial budget not only makes plans to hike the carbon tax by two-thirds – rising from $30/tonne to $50/tonne by 2021 − but eliminates from law the requirement for offsetting tax cuts. From now on the Horgan government plans to use its carbon tax windfall to "create jobs, benefit communities and reduce climate pollution." In other words, all the usual things governments spend your tax dollars on already.

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B.C. taxpayers have thus become the victims of a grand deception. Having agreed to a carbon tax on a solemn promise of strict revenue neutrality, their carbon tax has been turned into just another garden-variety government tax grab. It seems a betrayal.

Such duplicity has significance outside B.C. as well. Clearly any reference to implementing a "textbook" carbon tax must now be dismissed as mere ivory tower idealism. The platonic ideal of revenue neutrality is no match for the eager hands of political opportunism. Giving the money directly back to taxpayers never had a chance in the long run. And without the gold standard of B.C.'s revenue neutral tax acting as a template, other provinces are now free to indulge themselves in Green Fund spending orgies − rewarding favoured industries, handing out foolish energy subsidies and otherwise bolstering their re-election chances – without fear of any troublesome real world counterarguments.

However governments decide to price carbon dioxide emissions − either via a direct tax or an indirect cap-and-trade system – in the end it's just another efficiency-reducing, growth-stifling, wallet-shrinking tax. Like all the others.

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