It appears that the next Federal election in Canada (which must be held sometime between now and October 19, 2009) will be fought on the issue of carbon taxation, as two of the five big political parties in Canada recently released their carbon tax plans. While both plans call for increased taxes on greenhouse gas emissions and other taxes to be reduced, there are a significant number of differences.
The Liberal Party plan calls for a $40 per tonne tax on “greenhouse gas emissions” to be phased in over 4 years, though the plan does not define what is covered under the definition of “greenhouse gas”. This tax would replace a number of existing taxes on fossil fuels including excise taxes on gasoline and diesel fuel. An interesting note is that the existing excise tax on gasoline is equivalent to a $42 per tonne tax on carbon dioxide emissions, so the Liberal plan would not be an increase on the existing Federal gas tax.
The plan assumes that taxes can be collected on 75% of greenhouse gas emissions and after taking into account the facts that greenhouse gas emissions will be reduced and that the fossil fuel excise taxes will be eliminated, government revenues will increase by just over $15 billion once fully implemented. There is no indication of how this figure was arrived at or how much the Liberals expect greenhouse gas emissions to be reduced, but my rough back-of-the-envelope estimate is around the same level.
The plan claims revenue neutrality, but only $9 billion of the revenue is allocated towards actual tax cuts. Specifically a 1.5-percentage-point reduction in the lowest income tax bracket, and a 1-percentage-point reduction in the middle two income tax brackets. The highest tax bracket, however, would see no tax reduction. The remaining $6 billion in revenue is allocated towards a number of “tax credits”, primarily aimed at low-income families with children.
Calling the Green Party‘s document a plan would be generous – there are very little details given, and what details are given are either contradictory or lead to more questions than they answer. The press release states that “[b]y taxing carbon at the rate of $50 per tonne, the Green Party will raise $40 billion for the federal treasury”. A tax on carbon would raise no more than $9 billion. If we assume what is meant is carbon dioxide (not carbon), it is still difficult to see how the tax would raise more than $20-25 billion, once issues such as compliancy and reductions in emissions are taken into account.
The plan also calls for a one-percentage-point increase in sales taxes. The money from the carbon tax would be used primarily to increase the “basic personal amount”, that is the amount a person can earn before paying income taxes, from $9,600 to $20,000. A decrease in the employer contributions to two payroll taxes – Employment Insurance (EI) and the Canada Pension Plan (CPP) are proposed. These, however, appear to be poorly thought out, as they leave three big questions unanswered:
- The EI rates for the province of Quebec are different than for the rest of Canada – but the Green plan appears to assume they are the same. How will the Greens account for this?
- Quebec is exempt from the Canadian Pension Plan, as they have their own version, the Quebec Pension Plan. Any cuts to these contributions must be made by the Government of Quebec, not the federal government. How will the Greens account for this?
- CPP contributions do not go into general revenue – they go into a separate fund. But the carbon tax would go into general revenues. How will the Greens account for this?
The Green Party plan would have to address a number of issues if it were ever to be implemented as law. Given that the party has around 8% support in the polls, this likely will not be an issue. The Liberals, on the other hand, have a fighting chance of forming the next government.
Mike Moffatt is the Economics Guide for About.com.