September 23, 2020

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Carbon-tax changes could hurt low-income households

Hey there, time traveller!
This article was published 19/3/2020 (188 days ago), so information in it may no longer be current.


THE Manitoba government recently announced it will implement a new carbon levy at $25 per tonne, replacing the federal carbon tax and dividend program. The existing federal tax is set to increase to $30 per tonne this year. Simultaneously, the province has announced a plan to cut the provincial sales tax one point to six per cent.

Aside from the ecological effects and what these changes will mean for Manitoba’s commitment to reducing greenhouse gases, the Social Planning Council of Winnipeg is concerned about the economic effect these changes will have for low-income households.

Since 2019, Manitoba has participated in the federal backstop carbon tax program, which imposes a carbon tax on provinces that did not independently develop adequate carbon-tax plans. It rebates the revenue raised through the tax back to households proportionally to their household size, with an additional increment for rural households.

In 2019, the federal carbon tax was set at $20 per tonne of carbon emissions, increasing to $50 within four years. The amount of the rebate in 2019 was $170 for a single person and $339 for a family of four. This type of program is called a carbon tax and dividend.

Independent studies have shown the carbon tax and dividend program is broadly progressive; it gives larger dividends for low-income households than they pay in carbon taxes.

The Parliamentary Budget Office found, "In all provinces, the net benefits of the federal carbon pricing system are broadly progressive by income group. That is, lower income households will receive larger net transfers than higher income households."

The PBO found that, for Manitoba, households in the lowest two income groups will received a net positive economic impact of $68 and $80, respectively. That is, these groups will get more back in the dividend than they pay in carbon taxes. This positive effect will increase as the carbon tax and dividend program is fully rolled out. As the carbon tax increases to $50 per tonne by 2022-23, the lowest two income groups will each have a net positive financial benefit between $154 and $191.

If Manitoba caps the tax and dividend at $25 per tonne, low-income families stand to lose out on the benefits of this program, even if the dividend is maintained proportionate to the tax. This change will cost families in the bottom 40 per cent of the income distribution, $70 to $90 per year, by 2022-23.

Worse still, it is unclear whether the province will maintain any portion of the dividend under the new plan. Instead, it may replace the dividend in whole or in part with a cut to the PST from seven per cent to six per cent.

Economists Jennifer Winter and her colleagues have calculated the distributional effects of different revenue-recycling options for carbon taxes; they find that while a carbon tax and dividend is broadly progressive, using a carbon tax to cut PST would have a flat distributional effect for households in Manitoba.

Similar to the PBO, they find significant positive effects to households in the bottom 60 per cent of the income distribution in Manitoba, with net benefits ranging from $74 to $110, based on a $20 per tonne carbon tax. By contrast, cutting the PST has only a minimal impact for all households, with only a $24 net benefit for those in the lowest income group.

We need our government to do more to combat climate change, which remains an urgent global crisis and we know we must all do our share. However, we should also do so in a way that distributes the costs of action equitably, putting the greatest burden on those who have already benefited the most from our economy.

Currently, we do not know all the details of Manitoba’s climate plan, and much will depend on negotiations with the federal government. However, the details released so far indicate it could be both less ambitious and less equitable than the existing federal backstop.

In the 2020 alternative provincial budget by the Canadian Centre for Policy Alternatives — Manitoba, community groups, including the Social Planning Council of Winnipeg, demonstrated how the federal backstop program must be improved by making a greater commitment to the principle of progressive taxation and with deeper commitment to cutting greenhouse gases.

As Greta Thunberg warns, the eyes of all future generations are upon us. We cannot afford to fail.

Josh Brandon is a community animator for the Social Planning Council of Winnipeg.


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