Will New Brunswick Dare To Pull Out All The Stops?

Commentary, Taxation, Frontier Centre

In its discussion paper on tax reform, published in June, New Brunswick contemplates cutting its corporate income tax rate from 13 per cent to 5 per cent, the preferential rate it levies on small business. In this option, New Brunswick would flat-tax all corporate income at the same low rate, ending the arbitrary penalty that it imposes on companies with incomes greater than $400,000 a year. The proposition is, by Canadian standards, exceptional. Governments in this country typically limit tax changes to decimal-point alterations – and take years to implement them. But the bold New Brunswick proposal begs an obvious question. Why stop at 5 per cent?

New Brunswick’s strategic objectives in its tax-reform exercise are impeccable. It seeks to achieve “self-sufficiency” – independence from federal equalization payments – by 2026. (The province now finances only 60 per cent of the $3.2-billion it spends on provincial public services – 48 per cent from taxes, 12 per cent from licences and fees – and depends on the federal government for the rest.) It recognizes that this self-sufficiency requires corporate tax rates that are internationally competitive. It recognizes further that these tax rates must first be nationally competitive. Here, any single-digit corporate rate will suffice because the lowest provincial rates are double-digit: 10 per cent in Alberta, 11 per cent in British Columbia. (The highest provincial rates are all in the Maritimes: 16 per cent in Nova Scotia and Prince Edward Island.) Yet a low, single-digit New Brunswick rate wouldn’t necessarily be competitive internationally. The federal government has promised to cuts its corporate rate to 15 per cent (from 19 per cent) by 2012. Assuming optimistically that it keeps this promise, New Brunswick’s combined tax rate would be 20 per cent – the best rate nationally but a much higher rate than (for example) dynamic Ireland’s rate (12.5 per cent). A zero-per-cent provincial rate, on the other hand, would give New Brunswick companies a combined federal-provincial corporate tax rate of 15 per cent – leapfrogging the province into position as one of the most competitive jurisdictions for business investment in the world.

What’s so special about the proposed 5 per cent corporate rate anyway? For a truly competitive tax regime, New Brunswick will need to be as competitive in its small-business tax rate as it is in its big-business tax rate. Only two years ago, the province’s small-business rate was 1.5 per cent, lowest in the country. Now it’s 5 per cent – and one of the highest. (The provincial small-business rate in PEI is 3.2 per cent; in British Columbia, 3.5 per cent; in Alberta, 3 per cent; in Manitoba, 2 per cent.) The fact is that New Brunswick – unlike some other, luckier have-not provinces – is not going to gain self-sufficiency by drilling for it. New Brunswick will succeed by making itself irresistible to investment.

How hard would it be for New Brunswick to get rid of its corporate income tax altogether? Not hard at all. The province’s personal income taxes will produce $1.2-billion in revenue this year, 31.4 per cent of its own revenues. Corporate income taxes, by comparison, will produce $183-million, 4.5 per cent of the province’s revenue. (By comparison, the province’s lottery profits will produce $118-million, 2.9 per cent of its revenues.) With only a marginal cut in provincial spending, it should be easy to finance the zero-percentage corporate tax rate. New Brunswick is in a good position to buy itself global recognition, as a tax-competitive place to do bilingual business, at a remarkably low cost.

New Brunswick’s discussion paper proposes fundamental reform of other taxes – all of them consistent with research by the Organization for Economic Co-operation and Development, which shows that corporate income taxes are the most destructive of economic growth, and that personal income taxes are the second-most destructive. In accord with this philosophical perspective, the discussion paper offers a number of proposals to create “a growth-oriented business tax environment” and a number of proposals to simplify personal income taxes, most significantly by introducing a flat tax of 10 per cent of taxable income. From these proposals, the government will prepare a green paper of recommendations for formal debate. The government expects to introduce legislation some time this fall.

How will New Brunswick pay for the cuts proposed in its corporate and personal income tax rates? It will increase its sales taxes, “occupying” the tax-turf abandoned in the federal government’s two-percentage-point retreat on the GST. This is precisely what it should do. With Saint John now emerging as an important East Coast “energy hub,” New Brunswick will tax consumption rather than economic enterprise.

The corporate tax reform cited here is one of the more radical options presented in the New Brunswick discussion paper. But it doesn’t go quite far enough. New Brunswick needs a corporate tax rate that will reverberate across the country and around the world. It knows this. “A self-sufficient New Brunswick will generate more of its own wealth,” the province’s discussion paper asserts. “Achieving this goal will require fundamental changes. New Brunswick must undergo an economic transformation.”

Go for it, New Brunswick. All the way.