A group of Metro Vancouver mayors recently unveiled the details of an ambitious public transit expansion plan with a price tag of $7.5 billion for new capital and an extra $800 million for annual operations. For near term funding, the mayors proposed using transfers from other governments, fare revenue, a carbon tax, and road tolls. (In the longer term, they proposed a comprehensive road pricing initiative -- a topic we will leave for another article.)
The provincial government promptly kiboshed their request to divert $250 million annually from B.C.'s carbon tax revenue, so the mayors are now considering a new regional carbon tax that would be imposed on top of the existing provincial tax. This is simply a bad idea especially since it's not even clear that Metro Vancouver governments need more revenue for transit spending.
For starters, the regional carbon tax proposal is not rooted in sound economic principles. It is a de facto cash grab that will impose serious costs on Metro Vancouver's economy, further tarnishing the region's tax competitiveness and discouraging investment.
A carbon tax is usually justified as a price for the cost of carbon emissions. While it can create an incentive to emit less, it can also have adverse economic effects.
After all, a carbon tax increases the cost of gasoline, diesel, and natural gas -- things that both households and businesses rely on, whether to operate their cars, heat their homes, or run their operations. For perspective, B.C.'s current tax of $30 per tonne of CO2 adds roughly seven cents per litre to the cost of gasoline.
B.C.'s carbon tax is already unique in its wide application and high rate. It is by far the most comprehensive carbon tax initiative in North America (next is Quebec, whose per tax rate is a fraction of B.C.'s at $3.50 per tonne of CO2). As a result, B.C. businesses face artificially higher production costs relative to competing jurisdictions.
The provincial government's recent switch back to the Provincial Sales Tax (PST) made matters worse by adding a seven per cent sales tax on inputs used in the production process. And the recent provincial corporate income tax hike to 11 per cent from 10 per cent is yet another blow to B.C.'s business tax competitiveness.
Layering an additional regional carbon tax will make doing business in Metro Vancouver more costly, especially for energy intensive firms including those in the manufacturing, transportation, agriculture, mining, and oil and gas industries. Together these industries account for 18 per cent of B.C.'s economic activity. For businesses that aren't chased out of the region, the higher production costs will be passed onto their customers.
To ease the adverse economic effects, a sound carbon tax policy should be implemented alongside cuts to existing taxes--particularly those that strongly discourage economic growth. This includes distortionary taxes on income and profit making activities. The proposed regional carbon tax plan does nothing to offset the potential economic damage.
And it isn't even clear that Metro Vancouver municipalities need more revenue for transit expansion. A recent Fraser Institute report found that, collectively, municipal revenues in Metro Vancouver have grown robustly over the past 10 years --faster than provincial and federal government revenue. Specifically, municipal revenue increased 86 per cent from 2002 to 2012.
The real source of the "fiscal squeeze" experienced by municipalities is an inability to restrain the growth of operating spending, which has grown 74 per cent over the same period, also faster than senior government spending and benchmarks like provincial economic growth (57 per cent) and population growth and inflation (34 per cent).
Better control of operating spending would give municipal governments the room to reprioritize spending on public transit initiatives or infrastructure projects more generally. In the meantime, Metro Vancouver mayors should abandon their destructive regional carbon tax proposal.
(This piece was co-written by Ian Herzog, Fraser Institute economist)
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