British Columbians with low incomes will benefit from the carbon tax in its first year, but will pay more by the scheme's third year, a new study concludes.
The impact of the tax and its offsetting income tax cuts will become increasingly unequal unless the provincial government increases payments to low-income earners, the study says.
The study, by Marc Lee, senior economist with the Canadian Centre for Policy Alternatives, and Toby Sanger, senior economist with the Canadian Union of Public Employees, takes a detailed look at the fairness of the controversial tax.
The carbon tax scheme, which took effect July 1, recycles all carbon-tax revenues through personal and corporate tax cuts and a low-income tax credit.
"In year one, about a third of the revenues go to the low-income credit," Lee told The Tyee. "That's good news. That's a good, well-designed policy."
But while the carbon tax will increase steadily over the next five years, the low-income tax credit is scheduled to increase only once -- by five per cent in July 2009.
That means that by the third year, those in the lowest income group will end up paying an average $47 a year more than they get back in tax cuts and credits.
At the same time, those in the top income group will end up better off by an average of $311 in year three.
Stick with tax but change it: report
"It is important for policy makers to rectify this situation in the 2009 and future budgets by minimally ensuring that the credit grows in line with the carbon tax," the study says.
The study also argues that "revenue neutrality" -- recycling all the revenues from the carbon tax -- is "more of a political decision than anything else" and should be abandoned.
It argues the government should instead spend half of all carbon tax revenues on "major transit expansion, transition programs for workers, energy efficiency improvements for low-to-middle-income families, and an alternative technology development program."
Lee told The Tyee that he doesn't see the study's findings as a reason for axing the tax, as the New Democratic Party Opposition has been demanding.
"I'm more of a fix-the-tax kind of guy," Lee said. "I generally like carbon taxes with the caveat that the carbon tax isn't the only tool in the toolbox. You need regulations and standards and public investment, maybe a cap-and-trade system alongside them as well.
"Secondly, you have to design the tax in a way that makes sure that low-income families are not disproportionately hit by the tax in spite of having the smallest carbon footprints to begin with."
Said Lee: "I think they've done a pretty good job in terms of how they've designed the tax. There are some critiques to be made of the carbon tax system but they're relatively easy to fix. We recommend that the government do that in the 2009 budget."
Computer modeling used
Lee and Sanger ran data from Statistics Canada and the provincial budget through a computer model to determine the impact of the carbon tax on different income groups.
In the first year, from July 2008 to June 2009, the tax will cost the average B.C. household $253, the study concludes.
That's about one-half of one per cent of the average household income.
Accounting for the offsetting tax cuts and credits, the lowest 20 per cent of income earners will see a net gain of $38. That's 0.2 per cent of that group's average household income.
At the same time, the top 20 per cent of income earners will end up $62 ahead -- an amount that rounds off to 0.0 per cent of that group's household income.
By 2010/11, the tax is projected to cost the lowest income group $47 per household after tax cuts and credits.
In the same year, the top income group will come out $311 ahead -- 0.2 per cent of household income.
Lee acknowledged that these are relatively small amounts, but noted that the government's Climate Action Team has recommended increasing the tax after 2012, when it will hit $30 per tonne of greenhouse gases.
Biggest footprints get 'perverse' break
Economists have said that, to be effective, a carbon tax should reach $150 or more. At those kinds of levels, the inequality would be greatly magnified, Lee said.
"You want to get this right at the beginning so that if the tax were to be $200 a tonne, you wouldn't have these really massive regressive impacts."
He called the net benefit to the top income earners "kind of a perverse result. Those are the people who have the largest carbon footprint by virtue of having more airplane travel, larger homes, more cars, greater consumption overall.
"In a well-designed carbon tax system those people ought to be paying net taxes. They can reduce that by reducing their consumption."
The study notes that all income groups can reduce the money they spend on the carbon tax, which applies to virtually all fossil fuels, by reducing the amount they spend on carbon-intensive products.
However, the economists add, lower-income households are the least able to invest in energy-efficient technologies. "They are 'capital-constrained' and often lack the ability to invest in even simple technologies, such as compact fluorescent light bulbs.…
"For this reason, low-income households arguably should receive net benefits from the carbon tax regime in order to provide them with more options and choices in how they adapt."
Political support at risk?
Inequality can have a political impact, as well, the study says:
"If low- and middle-income people get priced out of the market while others can 'buy their way out' of change, climate policies may lose broad-based political support."
The study also considers the political ramifications of "revenue neutrality" -- the guarantee that all carbon-tax revenues must be returned to taxpayers. The concept has been ridiculed by carbon-tax opponents, both in B.C. and in the recent federal election.
"There is no reason why revenue neutrality needs to be part of the carbon tax system," the study says. "The government's approach of full revenue neutrality is more of a political decision than anything else, designed to make the tax more publicly acceptable.
"A common reaction, however, is to ask why a government would introduce a tax only to give the proceeds away, rather than spend revenues on other climate actions…"
No growth seen from income tax cuts
While proponents of revenue neutrality argue that the income tax cuts paid for by the carbon tax will boost economic growth, there is little evidence for this position, the study says.
"A recent study by the David Suzuki Foundation showed very little difference in economic impact among various options for recycling carbon tax revenues. Moreover, tax shifting is not sound public policy because at some point in the future carbon tax revenues should fall because we are doing such a good job at reducing emissions.
"Income tax cuts at this point would need to be revisited to maintain funding for public services."
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