Why Revenue Neutral Isn't, and Other Costs of the BC Tax

Guest Post by Willis Eschenbach

I hope against hope that this is my last post on this lunacy. I started by foolishly saying I would write about the benefits, costs, and outcomes of the BC carbon-based energy tax, so I was stuck with doing it. I discussed the possible benefits of the tax in “British Columbia, British Utopia“. To recap the bidding from that post, I showed that if we assume 1) that the BC folks could hold their CO2 emissions steady, with absolutely no increase for 50 years, and 2) that CO2 is the secret control knob that regulates planetary temperature, and 3) climate sensitivity of the secret CO2 control knob is not less than 3°C per doubling of CO2 … assuming all of those things, they’d achieve a 0.003°C reduction in temperature in half a century. Anything less than 100% on any of those, of course, means less than three thousandths of a degree savings.

I followed that with an analysis of the pre-tax and post-tax changes in the motor fuel sales in BC called “Fuel On The Highway In British Pre-Columbia“. Curiously, both total and per-capita road fuel (diesel plus gasoline) have increased since the tax was passed.

Next, I discussed how people are avoiding taxes by legally buying fuel in the Evil Carbon Empire, the USA, in a post called “The Real Canadian Hockeystick.” That just leaves the costs, and that means that once I finish this post I can go back to indulging in real science, or alcohol, or anything but carbon-based energy tax. So here are some of the important costs to individuals, to businesses, to the economy, and to society in general.

The first cost to me in this is the cost to common sense. Making energy more expensive is going in exactly the wrong direction. Forcing people to pay more for energy makes no sense at all. I want to see energy get CHEAPER, not more expensive. I cannot put this too strongly:

Cheap energy is the salvation of the poor farmer, the poor housewife, and the poor in general all over the planet. It is also literally and figuratively the driving force of a developing economy.

This means that anyone advocating policies that add to the price of energy is actively harming the poor, the farmer, the housewife, and the economy. In addition, those advocating increasing the price of energy are slowing economic development in the parts of the planet that need it most.

I don’t care if you say you’re averting rumored harm to the farmer and the poor in fifty years. That does not justify harming the poor today. That’s the biggest cost of the BC energy tax—it increases the price of energy, the very lifeblood of society, hitting the poor the hardest. That, to me, is the height of cruel lunacy and thoughtless destruction. The first and most important cost of the BC carbon tax is the cost to the poor, to the disadvantaged, and to the economy.

The second cost involves the concept of a “revenue neutral” tax. Here’s the official BC government explanation of the revenue neutrality of the BC tax:

The carbon tax is revenue neutral, meaning every dollar generated by the tax is returned to British Columbians through reductions in other taxes. Tax cut measures include income tax credits for low income individuals, cutting the first two personal income tax rates by 5 per cent, providing northern and rural homeowners a benefit of up to $200 annually, and reducing the business taxes.

Clearly, they’ve made an attempt to return the money fairly by apportioning it among businesses, individuals, northern and rural homeowners, low income people, and the like, so each group gets back roughly what they’ve paid to keep the revenue neutral. To understand the problem with this, let me try to disambiguate two concepts—“revenue neutral” taxes, and “sin” taxes.

“Revenue neutral” means you are swapping out a tax on one thing for a tax on another thing, and doing it in such a way that the tax burden stays the same. In other words, the burden of the new tax is offset by reductions in other taxes.

Of course, ideally, a perfectly “revenue neutral” tax would not change any individual’s taxes. Under a perfectly revenue neutral tax change, if you used to pay a tax on A, you would pay the exact same amount now but with the tax assessed on B. In the BC case, for example, where you used to pay a tax on income, instead you’d pay the same amount of tax on energy, based on its carbon content.

Of course, there’s a million practical problems with achieving such a perfectly equitable revenue neutrality, and I’ll get to them. But for now, let’s agree that a theoretically perfect revenue neutral tax would ensure that in the changeover, nobody gained and nobody lost. For every single person, the tax you used to pay on A you’d now pay on B. All of the money paid to the government goes back to the public. Nobody gains, nobody loses, fair and equitable, no increase in anyone’s tax burden, it’s just that the tax is assessed on something else, that’s perfect revenue neutrality… hold on to that thought.

Next on the agenda is the “sin tax”. This is a tax intended to discourage behavior. Take a tax on tobacco as an example, it’s known to decrease the rates of smoking. Why? Because smokers are the losers, it costs them money out-of-pocket. Typically, the funds raised by sin taxes on e.g. tobacco are used on anti-smoking campaigns, or programs to help people quit smoking, that kind of thing.

Now to the puzzler. Consider a hybrid tax, a “revenue-neutral sin tax” like the BC carbon-based energy tax. The problem with such a tax is that if it is perfectly revenue neutral, there’s little incentive to change behavior. By that, I mean, it’s no good to impose a $200 tax on gasoline and then hand the guy $200—he’ll just go spend the $200 on gasoline. So paradoxically, the more just and equitable the revenue-neutral sin tax is, the less it will affect behavior. In other words, in order for a revenue-neutral sin tax to be effective, it needs to be unfair …

In a perfect revenue neutral world there are no gainers and no losers, but you need people to lose so they’ll change their behavior … so you have to make it “not-very-revenue-neutral” to make it work.

The third cost is one of fairness, and this one has huge ramifications. Children I know all over the world have a clear sense of what’s not fair. Despite being revenue-neutral, which the BC plan demonstrably is, the plan is far from fair. By that, I mean that for far too many people, they are either spending more than they are getting back, or less than they are getting back. People look at that, and they don’t like it one bit.

My experience is that most folks don’t mind an equitably shared burden. I pay my California sales tax, 7.5% on most everything, without protest or resentment. I don’t like how some of that is spent, but it’s taxes, everyone pays the same.

But if I knew that three of my neighbors paid no sales tax on anything that they buy, and I was being charged not 7.5% but 15%, it would angrify my blood mightily, I’d resent it hugely. And that’s the BC situation.

One of the ramifications of this is that perceived unfairness greatly encourages people to cheat, in whatever way that they can. If people feel (correctly or not) that the government is screwing them, they’ll be happy to try to screw the government. This is not good for the rule of law.

The fourth cost is the cost to the poor. I give them their own category because the poor are hit the hardest by rising energy costs. Now, the BC plan does at least attempt to address this real issue, through something called the “Low Income Climate Action Tax Credit”, or LICATC … and this provides another example of why “revenue neutral” isn’t. Here are the requirements for eligibility for the LICATC:

You’re eligible to claim the credit if you’re a resident of B.C. and you:

  • are 19 years of age or older, or

  • have a spouse or common-law partner, or

  • are a parent who resides with your child.

Only one person can apply for the credit on behalf of the family.

In other words, if you’re a young BC resident who (like I did when I was young) is living on his own and working at a job at 17, you’re out of luck. If I’d been living in BC, I’d have been paying energy tax and getting nothing back for two long years.

After the two years of paying energy tax, once I turned 19 and was eligible, I could get $115.50 from the BC Government from the LICATC. Now, there’s lots of jobs for which you have to drive a distance. I commuted 45 miles each way for a couple years when I was younger. Someone doing that with an old car, say 15 miles per gallon, might burn six gallons per work day. Two hundred work days in a year, 1,200 gallons. The BC tax is about twenty-five cents per gallon, that’s $300 in taxes I’m paying … and the LICATC gives me $115.50. Once again the poor get the short end of the stick. David Suzuki doesn’t care how much his gas costs, heck, for all I know free gas is just one of the services provided by his adoring female devotees, and he’s got lots of slack in his budget … but the poor have no devotees, and no slack in their budget at all.

The fifth cost is the tax on the tax. Of course, the Government of Canada gets to charge the Goods and Service Tax (GST) on all transactions … including the carbon tax. So while BC doesn’t keep any of the tax money, Ottawa is extracting thirty million bucks per year from British Columbians, charging them money for the privilege of being taxed on their carbon-based energy use …

The sixth cost is the overhead. You can’t run a complex program like a carbon-based energy tax without lots of paper pushers. And when you have paper pushers you need representatives of the porkoisie to supervise them and keep them from being fired. You need people to write the regulations. You need people to interpret the regulations. You need people to make the regulations more complex. You need people to count every molecule of CO2, and I’m telling you, even on a molecular scale those buggers are tiny. You need carbon cops to enforce the tax, and courts to punish people who are guilty of tax evasion. You need people to explain the complex regulations and forms to the poor bastards that have to fill them out. You need cheerleaders to write endlessly optimistic speeches about how well things are going. The list goes on for a while more, and no part of it is cheap, it’s government work …

The seventh cost is the pensions. Every person taking your tax money today and faithfully giving it back to you tomorrow in blessed revenue neutrality will be taking your tax money for thirty years after they retire and not giving back a dime.

The eighth cost is the rent-seekers. These include folks like Sustainable Canada and other organizations for whom this is a grant-raising bonanza. Then there are a host of lawyers, advisers, accountants, consultants, and the rest of the good folk who make their living out of the hysteria surrounding the alarmism and the complexities of the regulations. They produce nothing useful, they are a dead weight on society, but they come right along with the tax, they mate for life.

The ninth cost is the cost of tax avoidance/evasion. I used to work as an income tax preparer. There’s a distinction between tax avoidance (which is legal) and tax evasion (which is not legal). Seems like a bright-line definition … until you find out that in the US, if you adopt a business policy purely to avoid a tax, the IRS says that is illegal tax evasion.

But under any definition there are several costs in this arena of what might be called creative responses to the BC tax. At a simple level, the cost is the money hemorrhaging out of BC into the pockets of American and Albertan gas stations for gasoline. But it’s much worse than that.

Next level up, many staples are much cheaper in the US. So when BC residents come across the line to fill up on cheap gas, hey, might as well buy milk and cheerios and flashlight batteries and all the things that are 30%, 50% cheaper across the border. This is no help to the BC economy at all, quite the opposite.

Next level up, since the tax there has been an increase of 4 million additional vehicle trips across the border per year. This is a huge cost in waste of gas, time, vehicles, and human energy.

Plus I read that there’s now a side industry putting concealed fuel tanks on trucks so that they can haul an extra fifty gallons or so of fuel across on every trip … wouldn’t surprise me.

Finally, in the most general sense there’s a cost to society when you encourage people to be scofflaws. Unpopular taxes which were perceived by the common citizen as being unfair caused a bit of trouble in Boston, as I recall …

The tenth cost is the hours people will spend filling out the paperwork. For example, the poor people, the people at the margin, the people sleeping in their cars or under the bridges, or with their aunties, can get a check from the government for the Low Income Climate whatever Credit, and they merely have to do the following (emphasis mine):

Claiming the Credit

You or your spouse or common-law partner can apply for the low income climate action tax credit when you file your T1 Income Tax Return with the CRA. On page 1 of your return, check the “Yes” box in the GST/HST credit application area.

If you have a spouse or common-law partner, be sure to complete the information concerning your spouse or common-law partner in the Identification area on page 1. Include his or her net income, even if it is zero. Enter his or her social insurance number if it is not on your personal label or if you are not attaching a label.

To receive the credit for your children under the age of 18, they must be registered for the Canada Child Tax Benefit (CCTB). If your children are not registered for the CCTB, complete the Canada Child Benefits Application form (RC66). You can also request the CCTB form by calling the CRA at 1-800-959-2221.

Riiight … grandma who can’t speak, read, or write English will be all over that one, as will the young guy living in his car and paying the BC energy tax while looking for work …

The eleventh cost is official hypocrisy. One surprising thing I found out in researching this is that the good burghers of BC have fields containing evil natural gas …  and even more coal. They don’t use much gas or coal themselves, in part because they have plenty of hydroelectric power. So although they personally dislike those nasty black fossils, they are all too happy to make a living selling them … the industry paid $1.3 billion for the use of the resources, and spent $6.7 billion on exploration and development. Total value of the fossil fuels exported from BC in 2010 was nearly ten billion dollars, about a quarter of their total exports. And to my surprise, seven billion dollars of that was from exporting coal. Big coal bucks, in other words.

So the BC folks are not too proud to take stacks of evil coal money, and thus be totally complicit in the extraction and use of fossil fuels, because as long as other people burn the fuels they can wash their hands and feel all pure … dang, you know this public expiation of BC carbon guilt is starting to make more sense.

What I hadn’t realized was that behind the facade of forest green, BC is a big-time coal baron. Funny how sometimes it takes me so long to finally wake up to some important part of the puzzle … in any case, of course they need to rid themselves of that secret shame, so it’s no wonder this particular carbon-taxing scheme could be sold there. They can get rid of their guilt that way.

And here’s the sting in the end of that tale. Any evil fossil fuel produced in BC which is sold outside of BC pays no carbon tax at all! So the big gas and big coal companies, which are producing gas and coal responsible for billions of tons of CO2, are exempt from the BC carbon tax. How ironic is that? The citizens pay the carbon tax, and the coal companies don’t … I never cease to be amazed at the strange contortions of these energy-taxing fools …

The twelfth cost is officials denying inconvenient reality. The so-called “fugitive emissions” (meaning leaks) of methane are a big issue with the radical left who would like to end fracking (and civilization as well, apparently). This has led to the curiously entertaining spectacle of the BC carbon-based energy tax taking “friendly fire” from DeSmog Canada for not accounting for the reality of these methane gas leaks in the greenhouse gas inventory. Gotta love the spectacle of green-on-green violence, not to mention the schadenfreude of watching the BC energy tax being bombarded from the left for a change …

In addition to that unaccounted raft of emissions from natural gas, you need to add in the emissions from all of the fuel bought in Alberta and the US. The official accounting denies the reality of both of those emission sources in the calculations of the effects of the tax …

You know, there are probably more costs from this crazy BC energy tax, but it’s late, and I’ve had it with BC’s attacks on the poor. Those financial and social costs and injustices would be enough to scuttle a plan which actually had some benefits … and since the benefits in this case are meaninglessly small, in a sane world it would have sunk without notice the year before it was implemented. And yet here we are, and the bureaucrats involved are already counting their fat pension checks …

In closing, let me offer up without comment my search of the official BC Government website:

SOURCE

Best regards to all, I’m going to go look at some numbers and do some programming in R and rest my mind …

w.

NOTE: This is one of a four-part series on the BC carbon-based energy tax. The parts are:

British Columbia, British Utopia

Fuel on the Highway in British Pre-Columbia

The Real Canadian Hockeystick

Why Revenue Neutral Isn’t, and Other Costs of the BC Tax