By Ben Eisen
and Taylor Jackson
The Fraser Institute
Alberta Premier Rachel Notley’s claim that her government’s new carbon tax is “revenue neutral” is, upon analysis, little more than an obfuscation of terminology.
Last week, the Alberta government unveiled its new strategy on climate change, aimed at reducing greenhouse gas emissions. The strategy calls for the implementation of a carbon tax that would reach $30/tonne by 2018, increasing government revenue by $3 billion annually once fully implemented and potentially increasing thereafter.
Notley said the plan is “revenue neutral” yet a closer look shows the proposal in no way meets the definition of that term and represents a significant tax increase roughly equivalent to 25 percent of the $12 billion the province anticipates in income tax revenue.
The common meaning of “revenue neutral” is that all revenues collected by a carbon tax are returned to the economy through offsetting tax cuts, with the result being no overall increase in government revenues or in the economy-wide tax burden.
Carbon tax proponents often seek to defuse criticisms that carbon taxes are effectively a “cash grab” by stating they can be designed to be revenue neutral because the negative economic consequences of a carbon tax can largely be offset by reductions in other forms of taxation, such as corporate and personal income taxes.
But the Alberta plan does no such thing. Specifically, Notley stated:
“We will put every penny raised through the carbon price to work here in Alberta – building our economy, creating jobs, and doubling down on efforts to reduce pollution and promote greater efficiency. The Alberta carbon price will therefore be revenue-neutral, fully recycled back into the Alberta economy. To that end, revenue will be reinvested directly into measures to reduce pollution – including clean research and technology; green infrastructure like public transit; to help finance the transition to renewable energy; and efficiency programs to help people reduce their energy use.”
She clearly claims that the carbon tax will be revenue neutral while just as clearly contradicting that very assertion. Again, revenue neutrality means no net increase to government revenues and no net increase in the economy’s tax burden. So if new revenue is used to reduce the deficit, increase a surplus, or fund new programs, it is by no stretch revenue neutral. And as Notley herself states, her plan involves using substantial portions of the revenue from the carbon tax to finance new government spending on initiatives such as green infrastructure and public transit. Yes, some money may be returned to taxpayers and businesses through tax credits – but certainly not all of it which, quite simply, means that the plan is not revenue neutral.
As noted, the purported advantage of a revenue-neutral carbon tax is that the money can be used to reduce emissions and be balanced by cuts in other taxes. Far from doing this, the Alberta government has increased both personal and corporate income taxes, widely regarded as among the most economically harmful taxes in the mix. A revenue neutral approach to carbon taxes would mean cutting personal and corporate income taxes – not raising both while layering a new carbon tax on top.
Under the premier’s apparent understanding of the term “revenue neutral,” a simple income tax increase used to finance new spending on education, health, or literally any other government priority would also qualify as “revenue neutral,” even though government revenues (and spending) would actually increase. Because much of the carbon tax revenue is going to be spent by government, with no off-setting tax reductions elsewhere, it is more accurate to describe the Notley government’s policy approach as “tax and spend.”
Despite the Premier’s claims, the new carbon tax will simply be the latest in a series of tax increases being imposed on Albertans and their struggling economy.
Ben Eisen and Taylor Jackson are analysts at the Fraser Institute.