A Nudge for Rip Van Winkle

Commentary, Equalization, Peter Holle

You can’t blame the NDP for aggressive tax cuts. The party simply recognizes reality – that it’s bad to have higher taxes than your neighbours, unless you want capital and young people to move next door, to places with more attractive prospects for economic growth. Sure, we need good public services, but at the end of the day high relative taxes, especially in a very mobile world, are a simple recipe for stagnation.

So thank you, Mr. Doer. . . . Oops. Wait a minute! Wrong province! I mean thank you, Lorne Calvert. It’s Saskatchewan that has the move forward NDP, not our local variety. On October 28th, Saskatchewan cut its provincial sales tax by a whopping two points, reducing its revenues by about $325 million. Last week, it added a plan to reduce its small business tax rate from 5 to 4.5%.

These aggressive tax cuts produced the usual debate among Saskatchewan’s local political tribes on affordability and whether these were the right taxes to cut. Generally, though, the community welcomed them. And no one denies that competitive fire from Alberta’s super-heated lower-tax economy was a big part of the equation. A palpable angst over its juggernaut neighbour pervades the daily discourse in Saskatchewan. They have to do something, and they are.

Meanwhile Manitoba’s defenders of the status quo are trotting out the usual excuses for this province’s continuing lack of tax competitiveness, Saskatchewan’s oil resource most prominent among them. But a close look at the numbers shows that argument to be hollow.

The Frontier Centre’s annual tax load index, started in 1999, the year Manitoba’s present government took power, reveals that other western provinces have cut taxes two to three times the Keystone province’s rate. B.C. and Alberta lead the pack, followed closely by Saskatchewan. Most reductions occurred before sky-high oil prices.

Contrary to conventional wisdom high oil prices actually hurt Saskatchewan’s finances. As cabinet ministers there repeat dutifully in their speeches, Manitoba – an essentially similar province – receives $1.6 billion in federal equalization, while the land of the living skies gets squat. Thank the foibles of its Alice-in-Wonderland transfer formula which subtracts Saskatchewan’s non-renewable oil revenues from the payments that now underwrite a full 20% of Manitoba’s budget. To add insult to injury, Manitoba’s advantage – its renewable hydro-electric resource, its “oil” – is not in the equalization formula. So the province gets away with relative fiscal (and environmental) malfeasance by selling a valuable resource far below market prices, with federal subsidies making up the difference.

Which brings us back to the issue of Manitoba Government’s response to the warm winds of tax competition, wafting gently in from the NDP’s fiscally more talented soulmates to the West. Manitoba’s notorious “perfect calm” – where the main policy focus has been to max out federal subsidies, prop up long–in-the-tooth delivery models – remains a continuing road to nowhere. Since the Doer NDP has been in charge, the federal subsidy portion of the provincial budget has grown by 44.7% – which far outpaces the 30% growth in own source revenues during the same time. Outside money now accounts for over a third of Manitoba’s total spending.

Let’s jump forward, assuming that someone in the Leg building finally discovers the link between lower taxes, investment and population growth; that the most basic policy modernization begins across all spending envelopes; and that power subsidies begin shrinking as we move down a smart green policy path towards market pricing.

Manitoba has no shortage of taxes to trim assuming it can ignore the embarrassingly uninformed chatter about evil corporations and greedy rich people that is a prominent feature of its “perfect calm” policy model.

First, end capital taxes ($174 million). Even the most dull-witted governments the world over are beginning to see that these charges destroy more revenue than they raise.

To encourage a thriving headquarter cluster downtown, cut corporate taxes ($396 million), but more importantly, start chopping the top personal income rate (17.4%), to below Saskatchewan’s (15%) or ideally to a flat rate like Alberta’s (10%). The estimated foregone revenues respectively are only $66 million or $207 million, not much to quickly even this playing field.

Eliminate the payroll tax ($312 million). Manitoba stands out as the only western province and one of only four jurisdictions in Canada with one. Since the market reduces worker’s pay by the amount of this tax, ending it will give those who pay it an equivalent raise over time.

Finally, if you want to protect revenues while helping investment and capital formation – harmonize the PST and the GST and cut the rate by at least two points. This would end the foolishness of making businesses administer two parallel sales tax bases while jumpstarting investment and business spending by allowing commercial enterprises tax refunds on their inputs and capital investments.

If Saskatchewan can afford tax cuts, so can Manitoba. It has the weakest record on tax reduction in Western Canada by far. It’s time to change that.