Justin Trudeau’s carbon tax is revenue neutral… for now

Posted on April 24, 2019 in Governance Policy Context

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CBC.ca – News/Opinion

If history is any guide, all that new revenue will prove hard for Ottawa to resist

On Thursday, the fiscal detectives at the Parliamentary Budget Office (PBO) will publish their assessment of a promise the Trudeau government will be repeating, almost as a matter of self-defence, in this year’s election: that the new carbon tax driving up gasoline and home heating costs will be entirely returned to taxpayers through tax cuts.

It’s right there on line 449 of your federal tax return, a credit of a few hundred dollars — more for a family of four, and even more for rural dwellers (the government, desiring re-election this fall, is actually granting the rebate for 2018 even though the tax didn’t take effect until this year).

And it promises in writing to continue doing so as the carbon tax drives fuel prices higher every year. In 2019-20, according to the federal budget, the government actually plans to give back more than it takes in; a $2.6 billion payout, as opposed to $2.3 billion in carbon tax revenues. In 2023-24, when the government expects the tax to take in $5.7 billion, the promised return to taxpayers is … $5.7 billion.

Ninety per cent of that will be direct tax rebates. The rest will be in the form of grants to universities and hospitals.

There is no way, really, to reality-check those numbers. The carbon tax is brand new. Everything, at this stage, is forecasting and modelling.

What’s going to be interesting is the PBO’s detailed analysis of who wins and who loses.

Wealth redistribution

Long story short, higher-income Canadians will only be refunded a fraction of the carbon taxes they’ll pay, while low-income Canadians, in general, will get back more than the tax costs them.

That shouldn’t be a surprise; it’s actually how the tax is designed. It punishes people who use more energy, usually those with higher incomes, who tend to have bigger houses and more luxurious cars, or boats, or cottages, and it rewards people who use less. Lower-income people are more likely to take public transit or live in apartments. The idea is to make higher-income people behave more like lower-income people.

That the carbon tax is also an instrument of wealth redistribution shouldn’t be a surprise. This is, after all, Canada.

What the PBO cannot say is how long the so-called revenue neutrality of the tax will last.

In other words, even if you accept the science behind the carbon tax, and I do, and the premise that it can change polluting behavior, something I also accept will happen when it gets high enough (solely because of the carbon tax, my next vehicle, four years or so from now, will almost certainly be a hybrid), can the government be trusted to resist the temptation to grab some of those new billions for spending it might want to do, or, as governments all call it nowadays, “investments?”

The answer from conservatives is, of course, no. Some of them, gormlessly, don’t believe the science in the first place. Some believe climate change is not caused by humans. Some believe the carbon tax won’t change anything. And almost all of them believe it’s just another nasty big-government tax grab. In general, conservatives aren’t keen on wealth redistribution. Liberals are.

Conservative Party of Canada leader Andrew Scheer, backed by several like-minded premiers, intends to make this a central issue in this fall’s election, promising to scrap the carbon tax if elected, replacing it, perhaps, with other, undefined measures. Conservative party messaging has ignored the return of carbon taxes via tax rebates. The party’s attitude seems to be that revenue neutrality is hardly ever achieved, and never lasts.

There isn’t really much history of revenue-neutral taxes in Canada, but what there is suggests all that new revenue will indeed prove hard for Ottawa to resist.

In the late ’80s, when Brian Mulroney’s government announced it was proceeding with a Goods and Services Tax (GST), it was promoted as revenue neutral, at least relative to the Manufacturers’ Sales Tax, the hidden levy it was replacing. Michael Wilson, Mulroney’s finance minister, even laid out exactly how the extra revenue would be returned to Canadians. It would not, he promised explicitly, be used to reduce the deficit.

Eventually, it was used to reduce the deficit. Some time later, I asked Wilson whatever happened to the revenue neutrality idea. He shot me one of his impatient glares, and snapped that deficit reduction was a serious matter, and a priority, and that was that. In other words, the government decided it needed the money.

In its 2008 budget, which brought in a provincial carbon tax for British Columbians, the government of B.C. promised that “every dollar raised will be returned to the people of B.C. in the form of lower taxes.”

And so it was. In fact, the B.C. government returned more to taxpayers than it collected, at least in the early years.

But Liberal Premier Christy Clark just couldn’t resist all that new treasure. Her government began “investing” some of the revenue in, among other things, tax goodies to encourage filmmakers.

The current B.C. premier, New Democrat John Horgan, eliminated the notion of revenue neutrality altogether, choosing instead to “invest” new carbon tax revenue to “create jobs, benefit communities and reduce climate pollution.” In other words, in B.C., it’s becoming just another tax. The government decided it needs the money.

In Alberta, Premier Rachel Notley promised revenue neutrality, but never delivered it. Former Ontario Premier Kathleen Wynne never made any pretence of returning the tax, and neither did Quebec. (Wynne’s tax, since scrapped by Premier Doug Ford, was a cap-and-trade system, as is Quebec’s).

So, what should voters expect from Justin Trudeau?

“Do I believe the government will stick to its promise? Well, I certainly hope it will,” says Prof. Chris Ragan, chair of the Ecofiscal Commission, the pre-eminent think tank on the subject of carbon tax. “It’s going to become really important.”

The carbon tax will eventually mean a tremendous rise in government revenues, says Ragan. There isn’t much temptation at $2.3 billion, but $20 billion is something else. And the government must resist it.

“This tax is about changing behaviour, not about revenue creation and increasing scale of government.”

Says Kevin Page, former PBO head and now a fiscal specialist at the University of Ottawa: “They [Justin Trudeau’s Liberals] will have to raise taxes or cut spending if they want to create some excitement with talk of some big initiatives in the 2019 campaign … Could this create some policy pressure to use higher carbon taxes to pay for climate change initiatives? Yes.”

Just so. Let history be my guide.


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