It was clear that when the NDP took power in British Columbia, a significant change in direction was coming for the province. That shift started to come into clearer focus with this week’s release of the September Update to the 2017/18 B.C. budget.
The update focused on fulfilling election promises such as removing the tolls on the Golden Ears and Port Mann bridges and increasing the general corporate income tax rate. Within the update the government also signaled its commitment to raise the B.C. carbon tax by $5 a ton of CO2 per year starting in April 2018.
The carbon tax increase was not part of the NDP platform, but was part of their post-election agreement with the B.C. Green Party. The carbon tax has remained at $30/t since 2012 and the previous Liberal government showed no inclination to increase it further other than to match the federal carbon price floor in 2021. The NDP’s election platform included a promise to raise the carbon tax, but the increases would not begin until 2020. The $5/t increase in 2018 is a compromise with the Green Party, as the Green platform had proposed a $10/t a year increase.
The B.C. Climate Leadership Team appointed by Christy Clark highlighted that increases to the carbon tax are necessary if B.C. is going to have a good shot at achieving its 2050 emissions reduction target (80 per cent below 2007 levels by 2050). The Team recommended increasing the carbon tax $10 a ton annually beginning in 2018. The $5 a ton increases are a step in the right direction, but still fall short of what is needed to put B.C. on the right track to meeting the target. If the NDP government is serious in their promise to meet the target, they will have to rely on more expensive regulatory policies to make up for the less stringent than recommended carbon tax.
Furthermore, the budget update declared an end to the policy of ensuring the carbon tax is “revenue neutral.” Since 2008, the carbon tax legislation has forced the government to report in the Budget tax reductions and tax credits that exactly offset the value of the revenue raised by the carbon tax. In 2008 when the carbon tax was introduced, the Liberal government announced that the general corporate tax rate would be reduced from 12 per cent to 11 per cent; in the September update, the NDP government reversed this reduction and raised the rate to 12 per cent.
Revenue neutrality is an idea taken straight from the pages of an economics textbook. The idea is to concurrently reduce other taxes that negatively affect our decisions to work, save, and invest. By reducing these distortions, the negative economic impacts of the carbon tax are partially or fully offset.
While great in theory, revenue neutrality is difficult to ensure in practice. Any offsetting tax cuts need to have not occurred in the absence of the tax; a difficult proposition to prove. At first, under the leadership of Gordon Campbell, the government followed the economics textbook and focused on reducing those taxes—such as personal and corporate income taxes—that result in negative incentives to work, save, and invest; thus, stimulating the B.C. economy in general.
Unfortunately, during Christy Clark’s tenure the government began to include tax credits to favoured groups, such as the B.C. film industry, when reporting the offsetting tax cuts in the carbon tax box of the annual Budget. Unlike the Campbell era tax cuts, many of these tax credits already existed prior to the introduction of the carbon tax and are of dubious economic value.”
Rather than eliminate these tax credits, the NDP has decided to rescind the corporate income tax cut. Tax economist Jack Mintz of the University of Calgary claims this increase will reduce the ability of the B.C. economy to attract capital investment. This may not be a major concern in today’s booming B.C. economy (the budget update increased the GDP growth forecast from three per cent to 3.6 per cent for 2017/18), but could be problematic down the road in leaner economic times. This change also runs the risk of fracturing the broad coalition that has historically supported the B.C. carbon tax; however, the expanded carbon tax rebate cheques announced for 2018/19 may buoy support amongst other groups.
The budget update also shows the fiscal implications of removing the tolls from the Port Mann and Golden Ears bridges (the tolls were removed earlier this month on September 1). The toll removal reduces government revenue by $224 million this fiscal year, which is larger than any of the increases in spending announced for this year. That is a large chunk of money that could be spent on other things.
Following removal, traffic on these major bridges increased dramatically. The tolls were never the optimal congestion reduction policy; though they reduced traffic congestion on the major bridges, they also increased congestion on the more dangerous and un-tolled Pattullo bridge: an accounting of costs and benefits was needed. The best way forward to reducing congestion would be for the NDP to work with the Mayors’ Council (and the BC Green Party) to move forward with a comprehensive system of congestion pricing (like in London and Stockholm); however, the government’s current “Toll Free BC” rhetoric makes this an unlikely outcome.
Overall the budget update contained few surprises, but has sent B.C. on a new path going forward.”
Joel Wood is an Assistant Professor in the School of Business and Economics at Thompson Rivers University in Kamloops. Find him on twitter at @JoelWWood