Internal Revenue officials are moving ahead with plans to consult on and, eventually, adopt recommendations from the Tax Working Group on environmental taxes, Marc Daalder reports

Recommendations from the Tax Working Group (TWG) on a range of environmental taxes could be adopted by a future Labour-led Government.

Internal Revenue Department (IRD) officials wrote in a December 2019 policy paper, obtained under the Official Information Act, about plans to “undertake public consultation on the TWG’s environmental tax framework […] with a view to recommending the refined framework be adopted by the Government”.

The report was sent to Finance Minister Grant Robertson and Revenue Minister Stuart Nash.

A spokesperson for IRD confirmed to Newsroom that Covid-19 had disrupted the agency’s plans but the work was still progressing.

“Precise timings and outcomes of this work will depend on what the next Government’s priorities are, after the election,” the spokesperson added.

TWG recommendations

The Tax Working Group was set up to review the tax system as a result of a pledge by Jacinda Ardern during the 2017 election to await the results of an expert panel before implementing a Capital Gains Tax. Although the TWG ultimately did call for a levy on capital gains, Ardern then backed off the issuing, promising one would never be introduced while she was Prime Minister.

Despite refusing to adopt the central recommendation of the report, the Government did leave the door open to other aspects of reform for the tax system. This included a statement that the TWG’s environmental tax framework would be “considered for inclusion in the Tax Policy Work Programme” – the series of tax policies being worked on in the medium-term.

What did the TWG recommend on environmental taxes?

To start with, it recommended a framework for deciding whether a given issue could or should be solved through the tax system.

IRD has historically been wary of attempting to achieve external outcomes through the tax system, preferring instead to keep taxes neutral on the environment and recommend that other policy levers be pulled to reduce emissions or disincentivise polluting behaviour.

The TWG was more bullish, arguing there was a range of scenarios under which the tax system could be used to achieve environmental benefits.

As part of its proposed framework, the working group noted that taxes were suitable if the behaviour in question could be measured and if the issue was large-scale enough to justify the administrative burden. Moreover, the case for using taxation was strengthened if the negative behaviour was likely to decrease if priced or if large revenues could be raised.

Among the issues that could be subjected to taxation were greenhouse gas emissions through a stronger Emissions Trading Scheme, water pollution through a tax on leached nitrates into waterways, road transport through congestion charging and solid waste through the existing waste levy system.

IRD responds

The December tax policy report obtained by Newsroom went further than the Government’s April 2019 response to the TWG report, saying that workshops with stakeholders would be conducted early in 2020 with an eye towards public consultation in the middle of the year.

All of this would be undertaken with the goal of eventually adopting the TWG’s framework, which would then allow policymakers to test their arguments for a given environmental tax against the specially-devised guidelines.

Officials outlined the existing framework for environmental taxes, which is predicated on “whether the tax system is, at minimum, neutral in relation to environmental outcomes” and takes into account the suitability of other policy responses.

On the neutrality issue, they noted that existing exemptions for employer-provided car parks from paying the Fringe Benefit Tax could lead to negative environmental outcomes and proposed a similar exemption for employer-provided public transport vouchers to offset that. Newsroom reported in June that the proposal had stalled in Government.

The TWG framework was labelled as “useful groundwork for future work on environmental taxes” but IRD officials did raise one concern with the project.

This had to do with hypothecation – “the practice of recycling revenue raised from a tax or levy toward a particular earmarked purpose or segregated fund”.

“The TWG considered that hypothecation of environmental tax revenue would be useful in the medium term as it can reinforce the intent of the tax, address equity concerns, and enhance transparency. The issue of hypothecation also has close relevance to the idea of a just transition; a transition to a low carbon economy that is fair and supported by the populace,” officials wrote.

“It would be useful to have an agreed Government position on when it is appropriate to hypothecate revenues raised from environmental taxes.”

Marc Daalder is a senior political reporter based in Wellington who covers climate change, health, energy and violent extremism. Twitter/Bluesky: @marcdaalder

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