Focus on Climate Change
On February 19, 2008, British Columbia’s Finance Minister, the Honourable Carole Taylor, presented the Government of British Columbia’s 2008 Budget. The main theme of this year’s Budget is "Turning to the Future, Meeting the Challenge" and the focus is on the "challenge" of climate change. The Budget allocates over $1 billion in climate change initiatives, coupled with targeted tax reductions meant to stimulate investment in the province. Most noteworthy is the proposed introduction of a new carbon tax as one method by which the Government hopes to cut British Columbia’s 2007 greenhouse gas emissions levels by one-third by 2020.
The New Carbon Tax
The centerpiece of the 2008 Budget is establishing a "revenue neutral" carbon tax on the purchase or use of virtually all fossil fuels within the province. This includes a gasoline, diesel, natural gas, coal, propane and home heating fuel. The Government considers this will be "the broadest and most comprehensive" carbon tax in the world. The new carbon tax is to be introduced effective July 1, 2008.
The carbon tax base will include fossil fuels used for transportation by individuals and in all industries, including the combustion of natural gas to operate pipelines, as well as road, rail, marine and air transportation. The carbon tax will apply to fuel used to create heat for households and industrial processes, such as producing cement and drying coal. Biomass fuels will not be included. Mixtures that include both fossil fuel and biomass fuel (e.g., blended gasoline and ethanol) will be subject to tax only on the fossil fuel content. Fuel for inter-jurisdictional commercial marine and aviation purposes, and fuel to be exported, will not be taxed. Emissions resulting from industrial processes such as production of oil, gas, aluminium and cement, as well as emissions from landfills and other similar sources, will not be subject to the carbon tax at the outset.
The plan calls for the carbon tax to increase gradually over four years. The 2008 Budget proposes that the tax be based on $10 per tonne of associated carbon, or carbon-equivalent, emissions and will rise by $5 a year over the next five years – reaching $30 per tonne by 2012. As an example, the Government estimates that the carbon tax will start at 2.41 cents per litre for gasoline, rising gradually to 7.24 cents per litre by 2012. Diesel and home heating oil are expected to be taxed at 2.76 cents per litre, rising to 8.27 cents per litre by 2012. The carbon tax will be applied and collected at the wholesale level.
The carbon tax is forecast to generate approximately $1,849 million over three years. None of the proposed carbon tax revenue will be used for expenditure programs. Instead the Government expects that carbon tax revenue will be returned to taxpayers through reductions to income and business taxes. The Government intends to require a plan to be tabled in the Legislature each year, showing how carbon tax revenue will be returned to taxpayers through reductions to other taxes. A new "Climate Action Credit" for low income earners will be introduced and reductions to personal income tax rates, the small business income tax rate, and the general corporate income tax rate are planned.
The bottom two personal income tax rates on the first $70,000 in earnings will see a reduction of 2 percent from the current rate in 2008 and 5 percent in 2009, with further reductions expected in 2010. Effective July 1, 2008, the general corporate income tax rate will be reduced to 11 percent from 12 percent, with further reductions planned to 10 percent by 2011. As well, the small business tax rate will be reduced to 3.5 percent from 4.5 percent, with further reductions planned to 2.5 percent by 2011.
British Columbia residents will each receive a $100 "Climate Action Dividend" in June 2008, before the new carbon tax takes effect. The Government is encouraging residents to apply the funds toward purchases that can help reduce their greenhouse gas emissions.
Reaction to the proposed carbon tax is mixed. While the Vancouver Board of Trade has described it as a "smart" policy that will be "neutral to the pocketbook of the individual consumer and business," Retail BC predicted that the tax will disproportionately add to the cost burden of retailers. In a similar vein, the Canadian Taxpayers Federation described the tax as "anything but neutral for individuals, businesses and industries," and the Canadian Federation of Independent Business suggested that the carbon tax would effectively cancel out other tax relief measures included in the 2008 Budget.
Legislative and Regulatory Developments
The 2008 Budget announced a commitment to introduce a series of legislative and regulatory changes to support its new focus on climate change. The Government intends to introduce legislation in 2008 to enable adoption of a "cap and trade" system for large greenhouse gas emitters. Legislation is planned to introduce phased tailpipe standards to set limits on greenhouse gases from new vehicles sold in BC. The Government has also announced plans to pass enabling legislation covering Renewable Fuel Standards ("RFS") and Low Carbon Fuel Standards ("LCFS"). The RFS would require 5 percent renewables in gasoline and diesel by 2010 while the LCFS will require transportation fuel suppliers and importers to reduce the average global warming intensity of their products by 10 percent by 2020. As well, new standards will be introduced to set minimum requirements for the capture of methane gas from landfills.
The Government is also proposing amendments to the Utilities Commission Act to support the 2007 BC Energy Plan, including smart meters and rate structures to encourage energy efficiency. Finally, the Government announced its intention to develop legislation to encourage "green communities" by, among other things, requiring greenhouse gas emission reduction targets, policies and actions in all official community plans and regional growth strategies.
Investment in "Climate Action" Initiatives
The 2008 Budget couples the proposed carbon tax with an initiative to spend an additional $1 billion over four years for operating and capital expenditures and tax incentives for "climate action" initiatives. Some highlights of the broad-based package include a significant increase in capital and operating expense funding to improve and expand public transportation and a number of climaterelated economic investments.
The Budget proposes investments to support innovation in the pulp and paper and forest industries to help reduce those industries' carbon footprints and investments that should encourage research and investments in areas such as wood-waste co-generation, biofuels from wood, agricultural or waste biomass, and wood pellet production. $95 million is proposed for climate change research, including a feasibility study on the capture and permanent underground storage of CO2 generated by petroleum production at a natural gas plant in northern BC. As well, $24 million is allocated to the establishment of a "Pacific Carbon Trust" to invest in greenhouse gas-reducing projects in BC.
The 2008 Budget proposes an additional $6 million over three years to assist with eliminating the backlog in Independent Power Producer applications, with the aim of adding new green power supplies to augment the BC Hydro system.
The Government also announced a number of changes to the Provincial Sales Tax (PST), meant to dovetail with its "climate action" initiatives. Notably, the 2008 Budget proposes a to remove the PST exemption on purchases of coal and coke, except for residential use. Among other things, new PST exemptions are proposed for: biodiesel fuel; certain conventional fuel-efficient vehicles; ENERGY STAR qualified appliances; and, production machinery and equipment for local governments for power production and cogeneration.
These initiatives have come under sharp criticism from the Canadian Taxpayers Federation, which stated: "The government's attempt to create incentives for green projects while increasing costs to established industries such as mining shows it has lost its way." It went on to warn that "this misallocation of resources could result in the loss of high paying jobs in the province."
New Funding in Natural Resources, Health and Infrastructure
The 2008 Budget also proposes significant new investments over the next four years in areas not directly related to the Government’s "climate action" initiatives. Of particular note are new investments in the natural resource and health sectors.
The 2008 Budget earmarks $12 million to Geoscience BC for oil and gas exploration and for further development of geoscience data to support mineral exploration in regions affected by the Mountain Pine Beetle epidemic. $30 million is targeted to enhancing engagement with First Nations when Crown land and resource decisions affect asserted Aboriginal territories. The 2008 Budget also includes $40 million to promote Asia Pacific trade and culture.
A total of $21 million will be allocated to assist with environmental assessment and resource permitting demand. In particular, the Government proposes additional funding to the Environmental Assessment Office, and $5 million annually starting in 2008/09 for additional staff resources to reduce environmental permitting and licensing backlogs and to improve enforcement of environmental regulation.
The 2008 Budget provides an additional $2.9 billion over three years for increased health care funding, of which an immediate $100 million will be focused on medical research initiatives. An additional $543 million in capital spending over four years is proposed for specific health facilities expansions in Victoria, Kelowna, Vernon and Fort St. John.
$60 million is earmarked for new infrastructure funding over four years, including $30 million for the Build Canada Fund to help communities with drinking water, sewage treatment and other infrastructure projects. A new Provincial Transit Plan announced in January is costed at $14 billion to 2020, with the intent that it be cost-shared among the province, the federal government, the South Coast British Columbia Transportation Authority, and local governments.
In addition to the climate change related tax cuts detailed above, the 2008 Budget proposes some limited and specifically targeted tax relief amounting to $407 million in new tax reductions over three years.
The Government proposes a three-year phase-out of the capital tax on financial institutions, to be replaced in 2010 with a financial institutions minimum tax. Effective April 1, 2010, a minimum tax will apply to financial institutions that have net paid up capital in excess of $1 billion. A reduction in the provincial school tax rate on major industrial properties will be phased in over two years to equal the business class rate.
Proposed changes to the International Financial Activity Act are expected to provide incentives for international companies to locate head office functions in BC. These changes are expected to include an amendment to allow non-security corporations to trade in money market investments and an amendment to allow management and control functions, such as human resource and strategic planning services, as eligible international financial activities.
While the tax relief measures introduced in Budget 2008 were largely lauded by the business community, the Vancouver Board of Trade noted that there was no relief for top income earners, who are presently taxed at a rate of 14.7 percent, compared to 10 percent in Alberta.
The provincial Ministry of Finance expects British Columbia’s economy to grow by 2.4 percent in 2008, 2.8 percent in 2009, and 2.9 percent in 2010. The Government’s medium-term growth projections are slightly lower than those made by an independent group of economists consulted by the Government.
Consistent with provincial legislation, the 2008 Budget does not project a Budget deficit in its main estimates. The current fiscal year’s surplus is $2 billion. The 2008 Budget forecasts surpluses of $50 million in 2008/09 and $150 million in each of 2009/10 and 2010/11. By way of comparison, in 2006 the Government had projected a surplus of $400 million in 2007/08 and $150 million in 2008/09. The province’s debt to GDP ratio is forecast to decline slightly over the same period.