Stick to the Plan: Cut Taxes

Later this month the New Brunswick government will unveil its budget. For the better part of the last two years Premier Shawn Graham and Finance Minister Victor Boudreau have laid the groundwork for the province’s self-sufficiency agenda. And despite the backdrop of economic challenges faced by every jurisdiction in North America, it is hoped they will implement recommended tax changes as the cornerstone of their agenda. This is because the worsening economy makes sensible tax reforms more, not less, essential.

Last spring, the governing Liberals offered an impressive list of ideas to rebalance the tax system and create a growth-oriented tax environment. The overriding priority is to reduce the tax burden and make New Brunswick a more competitive place to work, invest and engage in entrepreneurial activities. Proposals include reducing the personal and business income tax rates, simplifying the tax code and collecting additional revenues from the provincial sales tax and a carbon tax.

Some might wonder what is driving this tax relief agenda. That is obvious. An aging population means the province needs to attract more skilled workers and the government recognizes taxes paid by its workers and businesses are higher than in competing jurisdictions. This makes New Brunswick a less attractive place for investment and a less desirable place for working families.

Two ideas for reducing personal income taxes are proposed. The first would replace the province’s four-rate system with a single 10% rate. The second, less dramatic change, would see two rates of 9% and 12%. The business tax of 13% could be lowered by as much as eight percentage points to give the province the lowest rate in Canada and eliminate what the governments accurately calls “the tax penalty on growth.”

Importantly, the province is looking to cut the correct taxes. It is not targeting tax relief at favoured groups that will fail to boost economic activity. Lower marginal rates on businesses and on wage earners will spur investment and attract high-skilled workers.

Proposed income tax relief would reduce government revenues by $500-million a year. Higher consumption taxes would recoup $350-million. All said, government revenues would be reduced by 2%. The objective is to take fewer tax dollars out of the economy and leave taxpayers with more money to save, spend and invest.

The good news is that the government’s tax package has been well received by the public. Voters understand action is necessary to increase the workforce and grow the economy. Nonetheless, some argue it is unwise to make tough decisions in tough times and are calling on the government to abandon its tax reform agenda altogether and instead focus on spending. They are ignoring the substantial body of research that demonstrates economic competitiveness is linked with a competitive tax base.

Saskatchewan recently became self-sufficient after cutting business and personal taxes. And Ireland, which for decades suffered from slow growth and an outmigration of its population, caught up with Europe with the help of pro-growth tax policies. These two jurisdictions accomplished what New Brunswick hopes to do, which is to build a vibrant job-creating economy and to ensure the government has adequate tax revenues to fund social programs.

Already the premier has dropped some proposals. A provincial carbon tax was jettisoned along with a plan to reorganize local government. And it is unclear if the Liberals are willing to raise the province’s consumption tax by two points. But so far, the government has only abandoned proposals to increase tax revenues. It seems tax relief remains a priority.

In January, Premier Graham said the government remains committed to lowering the province’s tax burden by more than $100-million when the budget is tabled on March 17. More recently, Finance Minister Boudreau warned the budget would trim spending to reduce the deficit. Finding savings in government will not be terribly difficult. The province already spends more money than the national average and expenditures have increased more than growth in population and inflation. And with provincial and local government spending at nearly 35% of the economy (GDP), New Brunswick has the second-largest government in Canada.

Competition for investment is going to be more intense in the coming years. This makes the need for reforms more necessary and offers New Brunswick an opportunity. Whereas governments in Alberta, British Columbia and Ontario are only now coming to terms with multi-billion dollars deficits and a dwindling tax base, New Brunswick recognized it had a problem early and developed a plan to solve it. All it must do is implement it. If it does, the province will emerge from the recession better positioned to attract businesses and compete for skilled workers than other North American jurisdictions.