Lower Taxes = Regional Growth
Do taxes matter? You bet. And governments in both Nova Scotia and New Brunswick seem to be
getting that message this year.
Take Nova Scotia first. The government has been getting some stick following its recent budget because of the promise of a $155 tax rebate to each income taxpayer, and the delaying until January 2004 of the long-promised cut in provincial income tax rates.
Sure there’s some politics here. The government wants to use tax cuts as a wedge issue in the election: the only way to be sure you’ll get that tax cut in January is to re-elect the government. Oh, and that $155 cheque is likely to arrive just in time for election day.
All of that has given rise to a lot of grumbling that there are better things we could do with the money. But this is a much worse kind of short-termism than what the government is doing.
At least the government is making a down payment on a long-term policy of desperately needed tax cuts. Some people seem to feel that we can set our tax rates at whatever level we please without affecting the total amount of economic activity. But they’re quite wrong.
I recently tried to hire a young professional from Ottawa to work for my Institute. When he compared Nova Scotia income taxes to Ontario’s, he saw that on an income of $52,000, he’d pay $2160 (or $1857 after Premier Hamm’s 2004 tax cut) more in income and payroll taxes than in Ottawa, where he now lives. And he’d also pay more for gasoline, wine, electricity and a whole host of other things.
Apartments are just as expensive as many parts of Ottawa, and houses on the Halifax peninsula are no bargain. He decided to stay put, creating value for the Ontario economy, and paying taxes to Queen’s Park. Lots of young Maritimers find that proposition attractive too, driven in part by those big tax differences. Jurisdictions all around North America have shifted from the failed old tax-and-spend strategy towards a growth strategy based on lower taxes and better value for taxes spent. Nova Scotia’s income tax load on middle incomes came down a paltry 3.4 percent between 1994 and 2001, the smallest fall in the country.
Ontario, by contrast, brought theirs down by nearly 39 percent over that period. The economy grew by over 40 percent (second only to Alberta) and income tax revenues were up nearly 30 percent because they were taking a smaller slice of a much bigger pie. Nova Scotia got slightly larger growth in income tax revenues, but clocked in at the third worst economic growth in the country. The government now boasts that the number of Nova Scotians at work is the highest in history, but other provinces have been beating their previous records for two or three years now. It’s nice to get into those leagues, but the question is, what took so long? Taxes are a major part of the answer.
New Brunswick has been committed for longer to tax reductions, but the going is slow. Premier Bernard Lord has been wrestling with the problem of uncertainty around tax rates. If your taxes are high compared to places like Ontario, Alberta, New York and Maine, it may not be enough simply to bring them down, because what comes down may go up again. When you’ve got a history of raising taxes, it takes a while to convince people that you’re serious about lower taxes.
Enter the recently announced New Brunswick taxpayer protection legislation, requiring referendums on new taxes and increases in the HST.
Especially since Ontario Premier Ernie Eves recently undermined similar taxpayer protection in
Ontario, however, New Brunswickers too are asking if this isn’t all empty symbolism.
It may be symbolic, but that doesn’t mean that symbols don’t matter. If governments make a
commitment in law not to raise taxes, they can change the law again later. But what they’ve done is to increase significantly the political price of doing so. In fact, what happened in Ontario proves the value of such symbolism. People got angry at Mr. Eves for treating so cavalierly a promise enshrined in law to cut taxes. The law hugely raised the profile of the government’s decision, and made the price of abandoning that promise much more obvious and painful than would have been the case otherwise. In fact, Mr. Eves had to reverse course and restore his tax cuts.
If we want better public services, the way to achieve it is not to dampen economic activity by taxing
work and risk-taking too hard. Instead we need to cut taxes, reward work and success, and let economic growth work its magic. Their baby steps in this direction may still be too timid, but our governments are giving growing signs that they understand that growth – and taxes- matter.
Brian Lee Crowley is president of the Atlantic Institute for Market Studies