There are many tax instruments. They can be applied at all levels of government and there are jurisdictional issues associated with each level (see Constitutional Provisions). They can target many different parts of the food system and have many different designs. For many, there is significant debate about what designs are most effective to achieve specific purposes, particularly related to health promotion, sustainable and equity. The nature of these instruments and some of the debates are captured here. Their application is found under the different goals where tax instruments are deemed useful to the transition process. The strategy in general is to tax the "bads" (many "bads" are currently incentivized by tax policy) and incentivize the "goods" (frequently, the "goods" are treated poorly or neutrally) (Chalifour and McLeod-Kilmurray, 2016). In this sense, taxes should be deliberately used to distort (positively to meet the purpose) resource allocation. Much of the policy literature on taxation, however, is about how to minimize resource allocation distortions which makes that literature less useful for the discussions on this site.
Federal
Provincial / territorial
Municipal
Federal
These instruments typically are or could be applied at a federal level, although some of them can also be applied provincially and some of them are shared (e.g., HST, income taxes).
Input taxes
Taxes and tax exemptions on synthetic chemicals
Most input approvals are regulated federally (see Goal 4) and inputs usually cross borders, so federal jurisdiction would appear to apply unless specific to a provincial sales tax regime. Agricultural chemicals receive somewhat favourable tax treatment currently because in most provinces they are sales tax exempt (see Provincial / Territorial and below for HST/GST zero ratings and exemptions). They are also underpriced relative to reliance on them, since pesticides typically only account for 5-6% of farm operating expenses (AAFC, 2015), yet most farmers are completely dependent on them for farm management. This means that pesticides are quite price inelastic, that significant upward price shifts won't necessarily reduce use, and that they will tend to be overused as a risk aversion strategy (Pierce and Koundori, 2003).
Consistent with the polluter pays principle, and the idea that prices should reflect value, costs and damage, the application of a pollution tax to synthetic fertilizers and pesticides has long been proposed to make agricultural chemicals better reflect their very significant social and environmental costs (Costanza, 1987; Fleming, 1987; Postel, 1987; Weinschenk, 1987). Maass (1989) calculated that a tax rate of 35% would cover many of the external costs of synthetic chemical use. The design, however, is challenging because the tax is addressing non-point source pollution (see general introduction to Instruments).
Such taxes have been applied in some jurisdictions in Europe and the USA since the 1980s. Although ideally a tax would be levied by unit of toxicity (Pierce and Koundori, 2003), this is complex to administer so the tax is typically applied to farm retail prices, sometimes at a very low level, e.g., a few percentage points. This approach is used to generate earmarked revenues for environmental programs and reduce opposition, but it typically doesn't reduce use and associated pollution (Daberkow and Reichelderfer, 1988; OECD, 1988).
A higher tax level would have a greater allocative impact, although studies have typically not considered substitution of other practices (Pierce and Koundori, 2003) and combinations of strategies such as what is proposed on this site. Consequently, the impacts of a higher tax are likely underestimated compared to what is proposed here. Weinschenck (1987: 58) stated that a nitrogen tax should " … induce changes in the farm organization … (including) better and more careful use of organic fertilizer (and) diversification of the crop rotation.". Such a tax, however, could require more administrative inputs, could result in higher consumer prices (see Goal 3 Reducing Corporate Concentration for measures that might counter this), and would raise a psychological barrier for policy makers, i.e., promoting an explicit policy of production reduction in some major farm commodities (see Goal 2 Demand Supply Coordination). Koopmans (1987) modeled the potential effect in Europe of a 50% tax on nitrogen, phosphorus and potassium over a 20-year period. He predicted major reductions in wheat and rice outputs, a decline in fertilizer use of 27%, and greater than 20% reduction in fertilizer delivery to the environment. Even with these reductions he concluded that these " … measures to protect and improve the environment are not necessarily at variance with economic objectives, particularly farm incomes." (p. 158). Land and product prices would rise substantially, however, but again this might be countered by many of the initiatives put forward here. Other German data suggest that a fertilizer tax of 200% would reduce use by 30%, farm income by 25% and water pollution by 50%. Farmers would, in response, place more N-fixing crops in their rotations. A similar rate of tax on pesticides would reduce consumption to just 18% of current levels (OECD, 1988).
Assessments of taxes in Europe, in the 1990s showed mixed results based on design. Sometimes the taxes worked because they had a signalling effect to farmers about negative environmental impacts (Pierce and Koundori, 2003). Other times, the tax revenue was used to fund programs that had a larger direct impact than the tax itself. In a few cases, the rate was set high enough to have a direct impact on consumption. However, all countries experienced different degrees of opposition (Söderholm and Christiernsson, 2008), and no schemes set rates comparable to those used in models. All this suggests the need to integrate the tax with other initiatives, as proposed on this site, and that a high rate tax, on its own, is unlikely to be a viable solution.
Production - related taxes
Carbon (or GHG emission) taxes
The two biggest food system contributors to GHG emissions are animal production and nitrogen fertilizer manufacturer, distribution and use. Both are heavily dependent on non-renewable fossil fuels, and also emit significant levels of carbon, methane and nitrous oxide as by-products of their use/production. These emissions are largely externalized costs, hence the need to shift price signals.
There is some debate about whether they should be applied at the producer or consumer level (Chalifour and Collin, 2019). Farmers are typically price takers, and given the generally poor state of farm income, a tax of this kind could be penal. They would also be at a competitive disadvantage internationally unless Border Tax Adjustments were applied at the same time. If the revenue received was returned on an average basis to the farm sector, that would be partial compensation and would constitutionally mean it wasn't a tax (as with the current federal carbon tax). The idea of a consumption tax is to shift consumer behaviour which then shifts production based on reduced demand. A study from Denmark, cited by Chalifour and Collin (2019), suggests this can result in lower emissions based on their modelling. Similarly, they reported on other studies with different designs that produced reductions in demand for GHG intensive foods. But given the structural problems of farm production, where price and demand reduction signals don't necessarily provoke rational responses on the production side (in part because of market distortions, in part because transitions to other types of production are difficult), this too can be a messy option unless the transition is managed and the tax part of a suite of interventions (see Goal 5, Sustainable Food).
Manufacturer taxes
These are typically applied under the category of excise taxes, as a fixed percentage of unit measure. They have been used successfully for years to increase the price of cigarettes and alcohol and reduce consumption because the manufacturer passes on the tax to the consumer (aka, sin taxes). These are considered indirect taxes. Note that excise taxes are not the only taxes applied to alcohol, so the excise tax is not the only contributor to higher retail prices. Some of these taxes are provincial and can include sales, volume and environmental taxes. Canadian wines are exempt from excise taxes if the wine is made from 100% Canadian agricultural product (Chalifour and Collin, 2019).
Distribution taxes
Border tax adjustments (BTAs), including border carbon taxes (BCAs) (adapted from Evola, 2018)
BTAs and BCAs are instruments that potentially reduce leakage. They are designed to reduce the chances of a domestic tax or charge intervention being compromised by imports and capital flight. A domestic tax or charge can make domestic products more expensive than imported goods, and thus encourage the import of foreign goods and the movement of firms to untaxed jurisdictions. The BTA applies an equivalent charge on imports or subsidizes domestic exports to eliminate the domestic charge to make the price competitive internationally, or does both. There is some debate about whether these adjustments are really taxes, depending on what they are designed to offset.
BTAs are typically assessed within the open border, free trade environment to which Canada is currently a party. Perhaps the most internationally accepted BTA currently is for Value Added Taxes (GST/HST in Canada). But there is debate about whether such taxes violate trade agreements. Part of the difficult is that the core rules of the WTO are derived from GATT 1947, when climate change had yet to be a recognizable problem. One view is that a BCA would have to be justifiable under Article XX of the GATT (see Goal 10) and designed so as not to invoke arbitrary restrictions on trade (Holmes et al., 2011). Another is that it would be considered a production processes and methods (PPM) intervention, and potentially then a violation since trade rules discourage discrimination based on PPMs (Herman, 2020).
However, in the context of this site, a more justifiable argument is GATT Article III, the like provision (see Goal 10). This provision, the root of trade agreements, states that products must be treated equivalently regardless of source. So, if a government decides to impose an environmental performance tax on domestic producers, it makes sense that it would impose an equivalent tax on imports to create a level playing field as per Article III. This is explicitly named as acceptable under Article II:1(b). If a carbon tax regime / price existed in the country of import, then that methodology could be used to set the border tax, if any indeed was required. If a domestic charge was put on prior to export, and it was equivalent to the Canadian charge, then no border adjustment would be required. If it did not, then a tax equivalent to the domestic charge could be applied. The tax would be paid by the importing firm. Alternately, imports would purchase allowances, as was proposed in a US bill (Bingaman/Spencer) that did not proceed. However, there is some question about whether an allowance purchase is a tax and that would affect what articles under the GATT would be brought to bear on a trade complaint. Canadian foods exported would only receive an export rebate if going to a country that did not have a carbon tax / price regime in place.
All these questions and contentions mean that a climate change border tax is unlikely to be part of WTO negotiations in the near term. However, the EU is moving forward with Phase I of its Carbon Border Adjustment Mechanism. It is being applied to a limited number of industries at the beginning but includes fertilizer, with levies to be collected starting in 2026.
Import tariffs
Under the Customs Tariff Act, and administered by the Canadian Border Service Agency, duties can be applied to imported goods. In Canada, many foods are subject to tariffs at different levels depending on such matters as supply management, free trade agreements, and the country of origin.
Consumption taxes
Taxes on high energy density or low quality foods and beverages
Sometimes referred to as fat taxes, the idea is to use taxes to shift the price signals for consumers on high energy, low quality foods and beverages. Their purpose is to reduce consumption, but they can be applied at the manufacturer, distributor or retail levels, with the idea that the tax will be passed on to consumers. In general, foods and beverages are price inelastic, so price increases don't necessarily reduce consumption that significantly. However, in a review of US food elasticity studies dating back to 1938, Andreyeva et al (2010) found that soft drinks, juice, meat, fruit and cereals were relatively less inelastic and the most inelastic were eggs, sugar and sweets, cheese and fats and oils. Given that soft drinks, juice and high sugar cereals are often implicated as consumption factors leading to obesity, a tax on these products is more likely to produce consumption changes than others. They also looked at cross-product price elasticities, for example price shifts between milks of different fat content. The French experience suggests that a graduated tax based on sugar content can be more effective than a flat rate tax (Le Bodo et al., 2022).
Behaviour economics also suggests that when people are trying to exercise self-control, e.g., giving something up or eating more healthily, then they are more sensitive to price. People also make choices favouring the present over the future, so price increases on low quality foods can help shift decision making. People also often respond to losses more than gains, so a significant cost can be perceived as a bigger loss. Finally, young people often have limited resources, so price increases can influence their choices. Several modelling studies examining taxation of sugary beverages have found they produce consumption reductions and health improvments but again design, and sometimes the suite of associated initiatives, are important to the outcome. In many cases, equity is a significant issues, especially when taxes are applied to basic food items such as meat, dairy and eggs (as opposed to sugary beverages and snack foods) (Chalifour and Collin, 2019).
A significant number of European and US jurisdictions have imposed these taxes, generally with reductions in consumption. There are however debates about the methodologies used in these evaluations and questions about the equitable effects on low income populations and small to medium manufacturers (Chalifour and Collin, 2019).
Taxes on foods with poor environmental performance
Chalifour and Collin (2019) review studies from other jurisdictions that model consumption taxes on foods with high GHG emissions or significant aquatic pollution problems. Some of these studies attempt to combine environmental and health related targets. There is significant debate about their effectiveness though modelling studies suggest they work with the correct design.
Goods and Services Tax (and associated Harmonized Sales Tax in some provinces)
A value added tax, first imposed in Canada in 1991, it is legislated under the Excise Tax Act. It includes most goods and services, but basic groceries are exempt or zero rated. Snack foods and many beverages, however, are taxed. It is estimated that provinces and the federal government raise about $7 billion annually from these taxes on food (Jeffrey, 2019c). There are debates about the exemptions and how they do or don't support healthy eating. The taxes charged typically only appear on the check out bill as summary totals, rather than on each item in the bill or in the shelf price so this lack of visibility may result in limited impact on purchasing behaviour (Chalifour and Collin, 2019). Other exemptions include farm livestock and fish for human consumption and farm equipment.
Income tax (and related programs and deductions)
Both the federal and provincial governments have the jurisdiction to levee income tax and this is typically coordinated, except in Quebec which requires separate filings. Although there is much debate about equity in our tax system, this site only examines some specific elements of income tax that impact pertinent themes.
Accelerated cost allowances
Provisions that encourage the substitution of land and capital for labour have been particularly criticized (Rodefield et al., 1978; Flinn and Buttel, 1980; Youngberg and Buttel, 1984b; Troughton, 1985; Strange, 1988a). Such criticisms have also been levelled on the fishery. For example, Accelerated Capital Cost Allowance provisions have been identified as penalties to those who follow a lower capital intensity approach. They have been used to make equipment purchases more attractive because the accelerated depreciation schedule front end loads the claims against revenue. To promote sustainable transitions, a "normal" schedule of cost allowances should be provided on all equipment, except that equipment that clearly promotes sustainablilty (Chalifour and McLeod-Kilmurray, 2016). Equipment that facilitates the use of more complex crop rotations would be a priority for such a program.
Under current rules, depreciation schedules range, depending on the category, from 0-100% depreciation. Higher depreciation schedules are often set for government priority interventions, but in the past, these priorities have rarely been associated with sustainability. However, there has been some movement in the direction proposed here with the ACCA for clean energy technology.
Income splitting
to be added
