Distributional Effects of Changes in BC's Carbon Tax Revenue-Use
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2022
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Abstract
Carbon taxes can impose a disproportionate burden on low-income households, who often spend a greater share of their income on carbon-intensive goods. Policymakers can improve the fairness of a carbon tax through revenue recycling. British Columbia has deviated from its "textbook" 2008 revenue-neutral carbon tax that returned all revenue to taxpayers through income tax cuts and a means-tested tax credit (the climate action tax credit, or CATC). Using Statistic Canada's Social Policy Simulation Database and Model, I estimate the distributional effects of BC's carbon tax and revenue recycling choices on households. I simulate two revenue-recycling schemes in 2022: (1) replicating BC's 2008 policy, directing 35% of revenue toward each of the CATC and personal income tax cuts; and (2) BC's current policy, with 15.7% and 24.3% of revenue funding the CATC and personal income tax cuts, respectively. BC's current carbon tax is regressive, with and without revenue recycling, where regressivity is measured by the carbon tax paid as a share of household disposable income across deciles. The CATC on its own is progressive, and personal income tax cuts are regressive. By increasing the generosity of the CATC, BC's carbon pricing policy becomes progressive and households in the bottom three income deciles receive net benefits (rebates that exceed carbon taxes). British Columbia can meet the goal of achieving a fair carbon tax regime by amending the way it uses its revenue.
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Geier, L. (2022) Distributional Effects of Changes in BC's Carbon Tax Revenue-Use (Unpublished master's project). University of Calgary, Calgary, AB.