The government of Newfoundland and Labrador has a revenue problem
WITH LOW OIL PRICES, government revenues are down, and the government is in a deficit. However, even at $100/ barrel oil the former Conservative government ran deficits and left the province with no savings. A key part of that story was the rash tax cuts the government introduced in 2007. Those cuts currently cost around $700 million per year and created over $4 billion of debt in 10 years—accounting for fully 40 percent of the province’s current net debt.
Newfoundland and Labrador has room to move on taxes
Despite being one of the highest cost jurisdictions in Canada for delivering public services, Newfoundland and Labrador does not have the highest taxes. The province’s taxes are lower than its neighbours, across corporate taxes, personal income taxes, and HST.
Just by putting the province’s tax system in line with those of neighbouring provinces alone—adjustments to corporate income taxes, personal income taxes, and sales taxes (HST ) — the province could raise on the order of $300 million to $600 million. Adding in a carbon tax, which other provinces are quickly doing, would raise another $200 million, bringing the total up to $500 million to $800 million.
This would reduce the province’s deficit by roughly 25 to 40 percent. Note that we are not advocating that the deficit be immediately reduced by this amount, but rather pointing out that there are options to reduce the deficit significantly through revenue adjustments.
Despite being one of the highest cost jurisdictions in Canada for delivering public services, Newfoundland and Labrador does not have the highest taxes.
Also, Newfoundland and Labrador could increase a number of revenue streams: capital tax, tobacco, liquor, hotel, airport departures, auto registration, royalties/resource income tax, extraordinary profits tax, etc. And with exemptions, refundable tax credits, and direct transfers, tax increases can be designed to protect lower income people and rural communities.
Times have changed: Governments from coastal, prairie, and central provinces, and from across the political spectrum — Tory, Liberal, and NDP — have all taken action to increase revenues, including corporate income taxes, personal income taxes, sales taxes, and carbon pricing, amongst others.
Public opinion supports higher taxes (Environics 2012)
- 73% of Canadians would agree to gradually increasing corporate tax rates back to what they were in 2008 (from 15% to 21%);
- Nearly two thirds said they would personally be willing to pay slightly higher taxes if that’s what it would take to protect social programs like health care, pensions, and access to post-secondary education; and
- 83% said they were in favour of increasing income taxes on the wealthiest Canadians.
Corporate taxes room to move
- Newfoundland and Labrador have lower general corporate tax rates than Nova Scotia and Prince Edward Island.
- New Brunswick is increasing its rate to 15 per cent, meaning Newfoundland and Labrador is tied for lowest in Atlantic Canada.
- Compared to Canada, more of Newfoundland and Labrador’s economic growth went to profits, and less in wages, in 2014.
Carbon pricing room to move
B.C., Alberta, Quebec, Ontario and Manitoba all have carbon prices or are in the process of adopting them. Soon, over 80 per cent of Canadians will live in provinces with carbon pricing.
HST room to move
Newfoundland and Labrador’s combined provincial and federal sales tax is lower than those of neighbouring provinces.
- Tax cuts since 2007 have disproportionately benefited the wealthy.
- Other provinces have raised tax rates for the wealthy, and five provinces have higher rates (from 16 to 25.75 per cent) than Newfoundland and Labrador (15 per cent).
- Newfoundland and Labrador’s tax rates are still well below where they were in 2007.
While a recession is not the ideal time to be increasing revenues, if doing so means avoiding spending cuts, it’s a win for Newfoundland and Labrador’s future economy.
But won’t tax increases cause job losses?
The government has stated that it will take action to reduce the deficit, and spending cuts would cause more job losses than tax increases would cause. Using additional revenues to prevent spending cuts will actually save jobs. This is particularly true if those tax increases and expenditures help to redistribute some money (the wealthy are less likely than others to spend their next dollar of income, particularly on local goods and services).
But won’t higher corporate taxes chase away business?
There are many factors that most businesses consider more important than taxes when choosing a location, from resource access to proximity of markets. For those that do prioritize taxes, Canada is the lowest in the G8. A 2012 KPMG study that looked at the business tax “competitive- ness” of 55 major cities in 14 countries ranked Canada the second lowest after India. There is room to move.
WHILE A RECESSION is not the ideal time to be increasing revenues, if doing so means avoiding spending cuts, then it’s a win for Newfoundland and Labrador’s future economy.
That is the medicine needed: measured, responsible action to protect the economy from further job losses and steady the private sector through the dip.