A Roadmap For Tax Reform
Posted November 21, 2014
Laurel Broten’s Tax and Regulatory Review provides a series of well-considered recommendations for reforming the province’s tax system. Virtually all taxpayers would pay less total tax under Broten’s array of proposals, a point missed in most early reactions.
Ms. Broten was in many ways an ideal choice for the assignment. Her report reveals a considerable grasp of tax policy and of successful reforms in other jurisdictions. She is also much more than a policy wonk, with ten years’ experience in senior cabinet positions in Ontario.
So she understands the political context, but has not pulled her punches. Rather, like the Ivany report which she is glad to invoke, she provides a clear-eyed view of the very substantial challenges that the province faces, and the need to face them now. In so doing she has provided the foundation for government to make bold but needed changes.
The report begins with a correct assertion that deficits must be eliminated and debt reduced. It then makes a compelling argument for reducing and simplifying taxes, both corporate and personal. Nova Scotia has very high rates compared to other Canadian provinces. That makes it hard to attract both people and businesses, and accelerates the out-migration of young people.
Broten is stalwart in defending the elimination of the fifth tax bracket of 21% on income above $150,000. She argues that it sends a conspicuously negative signal to current and potential high income earners both inside and outside the province. The same is true of corporate income tax rates. A good argument can be made that lower rates will actually result in more tax revenue if it translates into more high earners and corporations choosing Nova Scotia.
Broten does not include an increase from growing the number of taxpayers in her projections; in fact the changes may be needed to prevent revenue from decreasing.
She also recommends increasing the personal deduction to $11,000, consolidating the third and fourth tax brackets, and reintroducing inflation indexing.
All of this simply brings Nova Scotia more toward the mid-range of personal income tax policies in Canada. But together with modest net decreases in corporate taxes it reduces income to government by $235 million in 2016-2017.
There is broad agreement among economists and tax experts that consumption taxes (HST) are less harmful to the economy than income taxes. To pay for the reduction in income taxes Broten recommends increasing the amount of HST we pay.
Since the rate we pay we is already the highest in Canada further increasing it is not an option. But broadening the taxable base is. So the report proposes eliminating a list of exclusions: printed books; children’s clothing, shoes, and diapers; feminine hygiene products; residential energy; and first-time home purchases. These raise $128 million.
Campaigning that some of these “necessities of life” should not be taxed was part of the NDP’s successful 2009 election campaign, and part of their lie about having a plan to balance the province’s books.
It is nevertheless important to minimize the impact of HST changes on low income households. For that, Broten proposes increases to heating assistance and other low income benefits, which will cost $80 million in total. If anything, the lower income earners may end up better off than they are today. Good.
She also proposes a carbon tax, to be phased in over 10 years, only beginning in 2020 for electricity. Modeled on the British Columbia example, this would chiefly affect automotive and heating fuels and would be fully offset by tax reductions and credits focused on lower income individuals, and corporate tax reductions.
The most ambitious recommendation is that spending be frozen for five years. That produces growing surpluses starting in 2016-2017. By 2019-2020 the report projects $1.14 billion which could be available for further tax relief, debt reduction, or spending choices.
Finance Minister Whalen wisely refused to provide an immediate reaction to the report. That gives time for the contents to be fully absorbed. In contrast, opposition leader Baillie’s knee-jerk dismissal is disappointing, and odd since the report echoes several of his own positions.
Broten knows very well that some of her recommendations are difficult for politicians. Regardless of her arguments some may be unable to abide tax reductions for high income earners, especially in the early part of the transition. Some may flinch at the prospect of charging HST on diapers or children’s clothing. Some may quail at the thought of gas prices going up because of the carbon tax, regardless of the amount of offsetting income tax benefits.
The value of the report is that it, in line with the Ivany report, brings crucial issues into focus. It is imperative that we cease having the highest tax rates in Canada for both businesses and individuals. It is imperative that we not only eliminate deficits but also begin to pay down the debt.
The growing surpluses in her projection provide a challenge to which political actors must respond. How much do they want to use for tax and debt reduction? How much will they forego because they can’t take the heat for some of the tax recommendations?
And are they willing to freeze program spending? This is often attempted but rarely achieved. Saskatchewan in the nineties is cited as an exception. Allowing expenses to increase just 1% per year would give up $500 million of the $1.14 billion 2019-2020 surplus.
The report points out that across-the-board measures don’t work but provides only high level thoughts on how the freeze might be achieved.
When it is time for the government to speak let them first say whether they agree with Broten’s analysis of where we need to go, or what their preferred destination might be. Then let us hear a realistic statement of how they would see us get there.
Likewise let the opposition parties and other political actors speak to the same question.