Since my car accident, wherein I sustained a concussion, I have been unable to have the focus and where-with-all to blog, but I am going to give it a try as today is an important day.
Today was a big day in the policy world, as the Saskatchewan Court of Appeal released their decision on the constitutionality of the federal carbon backstop. The decision is here and is actually a fairly easy read. The decision was a 3-2 split decision that upheld the constitutionality of the backstop. We know that Saskatchewan will appeal the decision to the Supreme Court of Canada (SCC). We will simply have to see if the SCC will hear the appeal and, if so, what will be its decision. That is, the is not the end of this battle, more like the middle of it.
While there were lots of arguments over whether the backstop was sustainable under the national concern branch of the Peace, Order, and Good Governance clause of the constitution or a general trade and commerce matter, and so on, the one most interesting to me (and to my readers, I am sure) was whether the carbon levy imposed by the carbon backstop was a tax or a regulatory charge.
The federal government argued/argues that the carbon levy under the backstop is a regulatory charge. I’ve written about regulatory charges before here. I find it easy to compare them to user fees, a concept that more people understand. A user fee is a levy for a publicly provided good or service, the revenues for which must be solely used to fund the provision of that good or service, and the fee charged is dictated by the cost of providing the good or service. Further, payment of the fee is a necessary condition for consuming the good or service. There are many examples of user fees, particularly at the municipal level, including public transit fares, recreation fees, and refuse collection payments.
While a user fee is a charge related to a publicly provided good or service, a regulatory charge is a charge related to a right or privilege granted by a government. Regulatory charges are a broad category of charges imposed by governments and include such levies as development charges, local improvement charges, removal and dumping charges (e.g. sand, gravel, water, landfill, electronics, and beverage containers), fines, inspections, environmental protection, and licenses (e.g. liquor, animal, and business).
There are four key components to a regulatory charge: (1) a specific regulatory purpose: (2) a detailed code of regulation; (3) actual costs incurred; and, (4) a relationship between the regulation and the person being regulated (Farish and Tedds 2014, p. 658; Althaus and Tedds 2016, p.53). Under a regulatory charge, the revenues must be used to recover the costs of the regulatory scheme, in whole or in part. That is, much like a user fee, a regulatory charge is a cost-recovery tool and the conditions described above that a user fee must meet must also be met by a regulatory charge. This means that regulatory charges and user fees differ only in purpose. Both are cost-recovery tools: a user fee is a charge for a good or service, whereas a regulatory charge is for a right or privilege (e.g. serving liquor, owning a dog or cat, the disposal of specific products, or, based on this ruling, the right to pollute).
Saskatchewan argued/argues that the carbon levy under the backstop was a tax. What is a tax? The key distinction between a tax and a user fee/regulatory charge is that the former is a payment for the purpose of raising revenue not connected to the activity being taxed, whereas the latter is a payment connected to the activity being charged. Notably, tax revenues can be used to fund any government activity, whereas user levies are constrained in this area. For example, revenue from income taxes can be used to fund the RCMP, the Canadian Space Agency, and Parks Canada. Tax revenues may be earmarked for specific purposes, for example the revenues from a fuel tax may may be earmarked for the purposes of providing roads, but that earmarking is a political choice rather than a legal constitutional requirement.
Saskatchewan went this route for two reasons. First because taxes must be imposed by the legislature, whereas a regulatory charge only needs to be approved by Governing–in-Council, if the levy under the backstop was a tax, and not a regulatory charge, than the federal government did not obtain proper approval (this is what is behind that saying “no taxation without representation”). This is not a fatal flaw, it would just mean that the federal government would have to follow a different process to have the levy be valid, namely it would have to be approved by the legislature. Second, governments and government property do not pay taxes. This is important in Saskatchewan where power and energy are governed by crown corporations. A regulatory charge would apply to them, whereas a tax would not.
The interesting aspect to this is whether or not the levy was found to be a tax or a regulatory charge, the federal government has the authority either way. The difference simply being that the levy would not apply to governments and the levy would need to be approved by the legislature. The latter is a simple process matter to correct, the former impedes the effectiveness of the levy.
What was the decision? Well the majority went through the case law and found the levy is a property enacted regulatory charge. The minority decision did not go into as much of a detailed analysis of the case and finds the levy is a tax. Overall, I find the majority decision much more convincing in its finding, but I look forward to the SCC review on this matter.
However, I am also a little sad as an aspect in the case law I was hoping would get settled didn’t. Not alluded to above, there is a second permitted use of a regulatory charge. One where the size of the charge levied on persons is set to proscribe, prohibit, or encourage a specific behaviour. If the purpose of the regulatory charge is to change behaviour, then a surplus of revenues may be a permitted outcome. However, the presence of a behavioural modification aspect has been found by the courts to mean the regulatory charge meets the criteria of an indirect tax. The authority to charge indirect taxes, however, is not delegated to the provinces and but is in the wheel house of the federal government. What we do not have definitive ruling on is what are the constraints on the behavioural aspect of a regulatory charge. This is important to me and to the Ontario Government, who argued that the carbon levy as part of the backstop was not a proper regulatory charge BECAUSE it has a behavioural component. I can’t find any discussion on this in the current decision. That may be because Ontario was just an intervener and not the petitioner.
So there you go, that is the tax vs regulatory charge explanation related to the carbon levy and the Saskatchewan court case. Hope it make sense!