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New Brunswick's provincial flag flies on a flagpole in Ottawa on July 3, 2020.

Adrian Wyld/The Canadian Press

New Brunswick was a charter member of the resistance against carbon pricing. Then it became a reluctant convert. Now, the province is charting a conservative course on carbon pricing, one that could be a model for other conservative-leaning governments across the country.

Last week, New Brunswick announced that it would trim personal income taxes, returning some of its carbon revenue to taxpayers. It’s a modest step; even by the most generous estimation, the province will still spend well over half of the net carbon revenue it collects.

But it is a step toward the idea of using carbon revenues to reduce income taxes, a notion that British Columbia abandoned years ago, and one that the federal Liberal government has never embraced. And the reduction underscores the changing fiscal climate in New Brunswick, where for years, taxes only headed in one direction – up.

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Finance Minister Ernie Steeves, borrowing an expression from Desmond Tutu, likens the cut to income taxes to eating an elephant, one mouthful at a time. “New Brunswick is a highly taxed province and any bite we can take out of that elephant, we will do it even if it’s a little bite,” he said in an interview.

The first bite is indeed little, bordering on symbolic. The lowest personal income tax bracket will drop to 9.4 per cent from 9.68 per cent as of July 1. Along with a small increase in the threshold that exempts low-income earners from paying provincial income tax, the measure will cut revenue by $28-million. That’s just 1.6 per cent of the province’s projected personal income tax revenue for fiscal 2021-22.

However, the tax reductions look a bit more impressive when measured as a proportion of net carbon revenue. New Brunswick says that its carbon revenue for fiscal 2022 will be $163-million, but that figure overstates the amount of extra cash the province is collecting.

When the Progressive Conservative government launched a provincial version of carbon pricing, it cut gasoline and diesel excise taxes by nearly as much as the carbon-levy increase. It also set up rebates so that New Brunswickers using natural gas to heat their homes effectively paid no carbon charges. Together, those two policies account for $90-million in gross carbon revenue. Another $9-million goes to First Nations, under a revenue-sharing agreement.

What’s left is just $64-million in net revenue. Of that, 44 per cent has been allocated to tax cuts, with the remaining 56 per cent being spent on green initiatives.

Still, that proportion could grow over time. Mr. Steeves isn’t committing to future tax cuts as carbon charges rise through the rest of this decade, but he says that is his preferred path. “I’m certainly a fiscal conservative, and the goal would be to lower taxes if we can.”

That’s a significant shift in direction for the province, where under the previous Liberal government, income-tax and sales-tax rates rose.

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Nicholas Rivers, Canada Research Chair in climate and energy policy at the University of Ottawa, said he welcomed the province’s pivot away from a policy of neutralizing the effect of carbon pricing, including by reducing fuel taxes.

“This is much more progressive,” he said, adding that New Brunswick’s approach is similar to that taken by British Columbia when that province instituted revenue-neutral carbon pricing in 2008.

B.C. cut both personal and corporate tax rates, as well as providing subsidies for lower-income households. In its early years, those cuts and payments were larger than the revenue for carbon pricing. But several years ago, the province abandoned the goal of revenue neutrality, instead spending most of its incremental revenue.

That leaves New Brunswick as the only province aspiring to cut income taxes as carbon revenue rises. Prof. Rivers said those offsetting tax cuts are preferable to the kind of rebates that Ottawa provides, at least in promoting economic growth. Lower income-tax rates provide an incentive for individuals to increase their earnings, he said, adding that reductions in corporate taxes has an even bigger impact on economic growth.

However, tax cuts alone will not help low-income households that do not pay income taxes. A hybrid approach, like B.C.’s original framework, would be optimal, Prof. Rivers said.

Ben Eisen, a senior fellow at the Fraser Institute, said he hopes that Alberta and Saskatchewan emulate New Brunswick’s approach and use carbon pricing as a way to shift taxation from income to consumption. And he said other Atlantic provinces would do well to follow their neighbour’s example in reducing excessive tax burdens.

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Maria Lily Shaw, an economist at the Montreal Economic Institute, said New Brunswick’s plan to cut taxes is “partially positive” but that it falls short of being revenue neutral. Still, Ms. Shaw said, the province is headed in the right direction, by reducing other taxes as carbon revenue increases.

Echoing Mr. Eisen, she said other provinces should follow New Brunswick’s lead. “Every other province should aim for a fiscally neutral carbon tax.”

Tax and Spend examines the intricacies and oddities of taxation and government spending.

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