British Columbia wants in the Pigou Club

Two of the more common criticisms I hear of a Green tax shift, that is a revenue-neutral rise in carbon taxes offset by a reduction in other taxes are:

1. A carbon tax is politically infeasible; no government would ever enact one.



2. Governments don't swap taxes... there is no such thing as a revenue neutral tax swap. Any rise in gas taxes is necessarily means higher taxes.

It looks like British Columbia didn't get the memo. Details from their budget, released yesterday:

B.C. Finance Minister Carole Taylor introduced an escalating carbon tax on most fossil fuels Tuesday... The carbon tax will start at a rate based on $10 per tonne of carbon emissions and rise $5 a year to $30 per tonne by 2012, Ms. Taylor said. The tax works out to an extra 2.4 cents on a litre of gasoline, rising to 7.24 cents per litre of gasoline by 2012.

But the tax is a revenue-neutral one:

Ms. Taylor said the carbon tax will be revenue neutral, meaning the government will not use money generated from the tax to fill its coffers. The carbon tax revenue, estimated to hit $1.8-billion over three years, will be returned to taxpayers through personal income tax and business tax cuts, she said.

The government will introduce legislation that requires it to table an annual plan that shows how the carbon tax revenue will be returned to taxpayers, Ms. Taylor said.

And since this tax-swap is naturally a regressive one:

To coax British Columbians to start thinking green, the government will send every resident a one-time $100 Climate Action Dividend in June. Ms. Taylor said the province hopes British Columbians will use the $100 to help adopt greener lifestyles.

Lower income British Columbians will receive an annual Climate Action Credit of $100 per adult and $30 per child to offset the cost of the carbon tax, she said.

I will need to see the details when they come out, but on the surface this appears to be an absolutely brilliant plan. (Note: I have no affiliation with the British Columbia Liberal Party, the moderately right-of-centre party in power in B.C. I don't even live in B.C.)

You have a small, escalating carbon tax that is used to reduce income and corporate income taxes. To quell any fears of regressivity, the government is sending rebate checks to low income households. It is about win-win as you can get in public policy.

One compliant that I am sure will come up is that the carbon tax rate is too small to reduce carbon (and pollution) emissions in any appreciable way. That complaint has merit. But let's suppose this tax rate has no impact on fuel purchases whatsoever - that it is completely non-distortionary. Then what the B.C. government has done is created a non-distortionary tax and used it to reduce income and corporate income taxes, two of the most economically destructive taxes in Canada. The Fraser Institute has estimated for every $1 collected in personal income taxes, there is a marginal efficiency cost (MEC) of $0.56. For corporate income taxes, for every $1 collected, the MEC is $1.55.

Replacing high-distortionary taxes with low-distortionary ones is simply good economics. Even if the plan has no environmental benefits whatsoever, this move is a wise one.