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The federal Liberals are leaving open the door for the provinces to cut their fuel taxes without fear of Ottawa neutralizing that reduction with a higher federal fuel charge under carbon pricing.

Previously, the Liberal government had been dropping not-so-subtle hints that provincial fuel tax cuts were a no-no. A more stringent benchmark system for federal carbon pricing comes into effect next year. And last July, Saskatchewan’s proposal to introduce its own version of Ottawa’s carbon tax was turned down.

Ostensibly, that was because of timing issues; the Liberal government said it wanted to wait until a review of carbon pricing rules was complete. But Saskatchewan Premier Scott Moe had a much different take: The Liberals did not like his province’s proposal to cut fuel taxes to offset carbon pricing.

There was ample precedent for Saskatchewan’s proposal: Newfoundland and Labrador, New Brunswick and Prince Edward Island have, to varying degrees, been allowed to cut taxes or otherwise exempt their citizens from the bite of the federal fuel charge. One difference: Those reductions came years ago, when the Liberals were trying to assemble a critical mass of support for their national carbon pricing strategy.

As recently as the first week of April, Environment and Climate Change Minister Steven Guilbeault pointed out the obvious: Cuts to provincial fuel excise taxes act in the opposite direction of the federal fuel charge, which currently sits at 11.05 cents a litre.

Those cuts “go against our efforts to fight climate change,” Mr. Guilbeault said during an interview on PrimeTime Politics on CPAC. The minister said he wished the provinces were taking other steps to help Canadians cope with inflation, without undermining that fight. “They’re just going for the easy solution, and probably one that is short term, in terms of political popularity.”

But that wish will not translate into action. In a statement, Mr. Guilbeault’s department said carbon pricing rules do not extend to “non-carbon price related taxation regimes,” and changes for “other purposes” are not considered when determining whether a province is adhering to the federal benchmark.

The wording of the benchmark policy employs similarly murky logic: Provinces must not undermine the price signal inherent in the federal fuel charge through instant rebates or “explicitly” reducing their fuel taxes.

In other words, a province can do whatever it likes with fuel taxes, so long as it doesn’t come right out and say it is reducing those taxes to blunt the impact of the federal fuel charge.

But there are a couple of problems with that policy. The most obvious is that Mr. Guilbeault is absolutely correct – it’s the net increase in taxes that matter. If the provinces offset the federal fuel charge, it is rendered impotent.

Even if one accepts the illogical framing of the benchmark policy, there is still a problem, namely that Alberta and Ontario have both tied their cuts to fuel taxes to the federal carbon levy. Alberta Premier Jason Kenney could hardly have been clearer; he called his province’s temporary suspension of its 13-cent-a-litre fuel levy “the reverse carbon tax.”

What could possibly be more explicit than that?

Ontario Premier Doug Ford was slightly more circumspect, but nevertheless he had called for Ottawa to cut its carbon charge in the weeks before he announced a temporary reduction of 5.7 cents a litre in his province’s fuel tax.

If you’re looking for clues as to why Ottawa is ignoring such provocations, look no further than Newfoundland. That province cut its fuel tax by 7 cents a litre in late May, about six weeks after Mr. Guibeault’s criticism of such measures by conservative governments in Alberta and Ontario.

Newfoundland Premier Andrew Furey, a Liberal, told reporters he would have done so earlier – but Ottawa’s rules on carbon pricing would have meant that the federal government would have imposed an additional levy to offset any cut.

However, the Premier said, he discussed the matter with Prime Minister Justin Trudeau in mid-May, clearing the way for Newfoundland to cut its fuel tax. Happily for Newfoundland, the path was cleared to cut its tax – now, residents of that province pay 2.2 cents a litre less in taxes than they did before carbon pricing was put in place in 2019. Even Alberta’s complete suspension of its fuel tax doesn’t cut quite as deep.

That forbearance for Newfoundland’s Liberal government continues a pattern of Ottawa cutting a fair amount of slack for the Atlantic provinces by allowing for exemptions to carbon pricing.

Those exemptions flatly contradicted Ottawa’s claim that it has set a national price on carbon, long before Alberta and Ontario began to cut taxes at the pump.

Taxing questions

Responding to last week’s newsletter piece on cuts to fuel taxes, one reader questioned the description of motor fuel as a price-inelastic good, pointing out that the figures in the article showed that demand would change as prices changed (although by a smaller amount). Demand for a truly inelastic good would not change as prices rose or fell, the reader contends.

The article is correct, although the specialized term used in economics could be confusing. What the reader is describing is a perfectly inelastic product.

For the most part, a perfectly inelastic good is a theoretical construct. But life-saving drugs such as insulin come close. What price would be too high for a diabetic to stop purchasing enough insulin to remain healthy? It would have to rise very high indeed. Of course, there would eventually be a limit – the diabetic’s income. Still, life-saving medications (that don’t have a substitute) are a close-enough example of a perfectly inelastic good.

Line Item

Stretching the definition of an employee: Quinta Essentia Wellness Studio and Tea Bistro has won its appeal before the Tax Court of Canada of a Canada Revenue Agency decision that the three yoga instructors who taught classes at its Sudbury facility were employees rather than independent contractors, as the now-defunct business contended.

In his ruling published last week, Justice Patrick Boyle wrote that Quinta’s yoga instructors met the dual test of being deemed contractors: intent on the part of worker and company, and facts on the ground that conformed with that intent. A key element cited by Justice Boyle: One yoga instructor had taken out her own liability insurance. The decision means that Quinta will not have to pay an employer contribution for the instructors under the Employment Insurance and Canada Pension Plan programs.

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