The effect of popular initiative and recall mechanisms on tax reforms: Lessons from the Carbon Tax and the Harmonized Sales Tax in British Columbia and Ontario By Geneviève Tellier, professor, School of Political Studies, University of Ottawa Paper presented at the Canadian Political Science Association Annual Conference, University of Calgary, May 31 – June 2, 2016 *please do not cite without permission from the author Abstract More and more, popular consultations and participation mechanisms are been viewed as an effective way to develop and implement better public policies. By seeking input and support from citizens, policymakers are able to design policies that are more responsive to the needs and desire of the population. However popular consultations can also lead to some undesired consequences. For instance, they afford new veto-power to some players that may be tempted to use them to further their own interests, which do not necessarily coincide with the general public interest. This was the case in B.C., when the government attempted to reform its sales tax by implementing a harmonized sales tax (HST), a value-added tax (VAT) that would be collected by the federal government simultaneously with its own VAT, the good and service tax (GST). Praise by tax experts and most businesses, the HST was nonetheless severely attack by some groups and high profile individuals that questioned its fairness. By examining the circumstances that led to the adoption and later the dismissal of the B.C. HST and comparing them to the adoption of other tax reforms in the country (namely the B.C. carbon tax and the Ontarian HST) we will show that partisan politics took over public participation mechanisms. Therefore, public participation mechanisms do not automatically lead to better public engagement and subsequently better public policies. This is particularly noteworthy in the case of tax reforms. The effect of popular initiative and recall mechanisms on tax reforms: lessons from the Carbon Tax and the Harmonized Sales Tax in British Columbia and Ontario 1. Introduction The declining rates of participation that have been observed at elections during the last decades (in Canada and elsewhere) seem to indicate that citizens feel less engaged, less involved in public affairs. This dissatisfaction with our current political system (often labelled “democratic deficit”) has triggered some questioning about how to improve our institutions. One concern relates to our elected representatives and how they can become more responsive and more accountable to their constituents. More generally, many are worried about the increasing centralization of power within the executive power (and even more among a handful of decision-makers) which diminished the role of the legislative branch. One mechanism that has received attention in recent years to counterbalance the power of the executive and empowered citizens is the recall initiative, a procedure that allows voters to remove their elected representative from office before the end of their mandate. By given some decision-making powers to citizens in between elections, decision-makers will be forced to listen more carefully to the concerns of local communities. Although not widespread, recall mechanisms exist in several countries1. In Canada, only one province, British Columbia (B.C.), has enacted legislation that allows recalls of Members of the Legislative Assembly (MLA). However, several private bills establishing recall mechanisms have been tabled in various legislatures across the country lately2. The recall mechanism exists in B.C. since 1994. It has been used on a few instances over the years, but not with a lot of success. Only one MLA has been removed from office because of a recall initiative3. For this reason, many believed the B.C. recall mechanism is ineffective. Yet before reaching this conclusion, we believe that we should examine more closely recent events that have occurred in the province. In 2009, the provincial government decided to adopt a harmonized sales tax (HST), as did several other provinces over the years. Contrary to these other provinces, however, the B.C. government was unable to successfully implement its HST, because of vigorous unpopular support. Yet, the same government was able to establish the first carbon tax in 1 Such as Argentina, Venezuela, Ethiopia, Nigeria, Japan, Belarus, Germany, Switzerland, and in 18 American States (International Institute for Democracy and Electoral Assistance 2016). 2 For instance in Québec by Coalition avenir Québec MNA Eric Caire in 2011 (bill 493); in Ontario by Progressive Conservative MPP Randy Hillier in 2013 (Bill 124); in the House of Commons by independent MP Brent Rathgeber in 2015 (C-697); in Prince Edward Island by Progressive Conservative MLA Steven Myers in 2014 (bill 100); in Alberta by Wildrose MLA Mark Smith in 2016 (bill-201). 3 In fact, this MLA resigned before he was officially “recalled”. 2 the country, just a year ago, and to secure re-election afterward. Moreover, another province, Ontario, facing an equally popular resistance, did implement its own HST the same year. Our research will try to explain this failure, by comparing the three cases, namely the B.C. HST, the Ontarian HST, and the B.C. carbon tax. These cases are interesting because they share many common elements. They are all related to tax reforms; they occurred at about the same time; and the governments that presented the initiatives faced many similar challenges. Yet, the faith of one tax initiative was clearly different from the two others. We will examine the circumstances that have led to the adoption (and subsequently the revocation of the B.C. HST) of these three tax reforms. Our study will draw on documentary evidences to establish comparisons between the three cases. Our analysis starts with a brief discussion about taxation and its fundamental role in our modern society. Democratic states need popular consent to taxation. The following section presents the direct democracy mechanisms that exist in B.C. Then each case will be examined by looking closely at the link between the tax reform and the support and opposition it draws. Our analysis concludes with a comparison of the three cases and the formulation of some lessons about the use and consequences of direct democracy, at least in the field of taxation. 2. Taxation and Direct Democracy Without a doubt, taxes play an important role in modern states. Not only do they afford important financial resources to governments to fund public services, but they also provide the legitimacy states need to act on behalf of their citizenry. Because citizens agree to pay taxes, they implicitly support the activities performed by the state. In other words, there would simply be no democratic state without public consent to taxation (Barilari 2000, Delalande 2011). The idea that taxes are a social contract between the ruled and their rulers is not a novelty. Many founders of modern political thoughts have examined this relationship (Locke, de Tocqueville, Weber, Schumpeter to name a few4). However, although the linkage between popular consent and taxation seems hard to contest, implementing tax policies remains a challenge in modern societies. Overall, taxes have a bad press. Because they are mandatory and are levied without direct compensations, it is difficult for most taxpayers to see a clear relationship between taxes and the public programs they help fund. Consequently, taxpayers usually have a natural propensity do dislike taxes, and some will even try to avoid them, more or less legally (Leroy 2003, Tremblay 2012)5. 4 For a detailed presentation about the founders of fiscal sociology, see Leroy (2011). 5 Through tax avoidance and tax evasion strategies. The former is legal (for instance, working less or moving to another jurisdiction to pay less taxes), while the latter is illegal (selling goods and services on the black market for instance). 3 On the other hand, governments will seek to create a “fiscal illusion” by using various sources of indirect taxes (such as consumption taxes) to hide the true value of taxes, knowing they are unpopular among voters. Another issue that is linked to taxation relates to the question of fairness and equity. Not everyone is taxed equally in our modern welfare state. Yet this situation is not fundamentally problematic, as it is widely accepted that the wealthiest should be taxed more, so that the State can help those that are the most vulnerable. Therefore, the progressive nature of our tax system is usually not questioned. On the other hand, however, taxpayers expect that all be threatened fairly and equitably. People in a similar position should be taxed similarly (horizontal equity) and those who are wealthier should be taxed more (vertical equity). The recent events on tax evasion (such as the “Panama Papers”) and tax revolt movements (“Occupy Wall Street”, and popular protests in Greece and Portugal after the 2008 global financial crisis) just showed how tax policies and tax reforms can stir vigorous debates, if people believe they are not treated fairly. The implicit contract between the state and its people through taxation should therefore incite governments to seek the support of the population if they want to adopt tax reforms. However, citizens are given very few opportunities to participate actively in the formulation of tax reforms and public policies in general. In addition, most participation mechanisms involve consultations, instead of an active engagement in the decision- making process (deliberative democracy). Although public consultations afford the opportunity for citizens and interest group representatives to convey their views to governments, they do not give them the possibility to participate actively in the formulation of policies. In other words, citizens are rarely veto-players in the policy process (Tsebelis 1995). This is especially so in Canada where governments enjoyed extensive executive powers, particularly if they are elected with a majority of seats in the House.