HST cut won’t solve New Brunswick’s tax competitiveness problem

Last week, in advance of the fall election, Premier Blaine Higgs unveiled a key campaign-style promise—to cut New Brunswick’s Harmonized Sales Tax (HST) by two percentage points (from 15 per cent to 13 per cent) over the next two years. Good news, right? Not so fast.

While this move would provide some relief to New Brunswickers struggling with the cost of living, it isn’t the best choice for a tax cut.

According to projections, this year the New Brunswick government will receive approximately $13.2 billion in revenue composed of transfers from the federal government (the largest single source of revenue) and taxes on individuals, businesses, property, and sales taxes such as the HST, which applies to most goods and services sold in the province.

The share of revenue from each source of taxation is known as the “tax mix.” Simply put, not all taxes are created equal. If the Higgs government cuts the HST—without reducing other more damaging forms of taxation—it will worsen the province’s tax mix.

Why? Because “consumption taxes” such as the HST generally encourage saving and investment, and do not distort decisions to work, invest or start a business to the same degree as other forms of taxation. Subsequently, consumption taxes are the most efficient way for governments to raise revenue.

Conversely, a high reliance on personal income and business taxes is damaging to the economy, given these taxes tend to reduce economic growth. For example, according to research in Canada, personal income taxes are 80 per cent more costly (measured in terms of reduced economic growth) than sales taxes. And business income taxes are 59 per cent more costly. In other words, the Higgs government could generate much more substantial economic benefits by cutting with personal income or business taxes.

This is especially true considering New Brunswick’s lack of tax competitiveness in these areas. For personal income tax rates, New Brunswick generally ranks among the highest-taxed jurisdictions in North America. And the province has the third-highest business tax rate in Canada and among the highest in North America.

To be sure, New Brunswick also has some of the highest sales taxes in Canada. But given that New Brunswickers generally earn less than their peers to the west and south, the government should reduce personal income and business taxes, which harm economic growth (and thus depress incomes), before cutting the HST.

In recent years, the Higgs government’s stable fiscal approach of balanced budgets and debt reduction have put New Brunswick in a stronger position to reduce taxes. For this, the government deserves much credit. However, with such a large-scale tax problem, the government should cut taxes in the most beneficial way. A sales tax cut may be politically expedient, but it would leave the larger challenges of uncompetitive personal and business taxes, and the consequent problems of low growth and low incomes, untouched.