by Ian Munro

Provincial Treasurer Wes Sheridan will deliver his first budget on October 16. This document is the first major deliverable of the new Robert Ghiz government and thus will be the one and only chance to make a good first impression on workers, taxpayers, employers, and investors. As Mr. Sheridan does his final i-dotting and t-crossing, we offer a few suggestions for his consideration.

First, let’s look at the tax side of the ledger.

The government should continue with the planned reduction of the small business corporate income tax rate down to 1% and also should begin reducing the general corporate income tax rate from the current 16% (which is the highest rate in Canada, in a tie with Nova Scotia).

Even better, Mr. Sheridan could announce a plan to eventually eliminate corporate income taxes all together. Corporate taxes represent a fairly small share of the provincial government’s own-source revenues ($38 million, a little over 5 percent). In fact, if the previous government had held the increase in program spending over 2006-2007 to 4.8 percent – still more than twice the rate of inflation! – corporate tax rates could have been set to zero without affecting the overall budget balance.

Some experts, such as Roger Martin, Dean of the Rotman School of Management at the University of Toronto, predict that increasingly mobile global capital will lead to the elimination of corporate taxes in the not-too-distant future. Here’s an opportunity for the Island to lead the way and bill itself as the most investment-friendly location in Canada.

Second, Prince Edward Island should proceed with the adoption of a harmonized sales tax (HST) as its Atlantic Canadian neighbours have done. Recent research by the C.D. Howe Institute shows that harmonization has a significant positive impact on business investment, which leads in turn to improved productivity, greater wealth generation, and higher economic growth.

As recent letters to The Guardian have noted, introducing an HST could have negative effects on those with modest incomes as the sales tax base is expanded to cover basic needs such as fuel oil and clothing. These impacts could be offset with lower personal income tax rates, higher tax-exempt basic personal amounts, enhanced working income tax benefits, and/or sales tax credits, just as the federal government currently provides GST/HST credits against federal taxes to taxpayers with incomes below a certain threshold.

Now let’s turn to the spending side.

In the previous government’s spring 2007 budget, spending grew by 8 percent over the previous year. Interest payments on the debt continue to consume almost one of every ten dollars the government spends and over the last five years interest costs have risen by more than double the rate of inflation.

These trends must be brought under control. The new budget provides the Treasurer with an excellent chance to establish the new government’s credentials for fiscal prudence by keeping spending under control and establishing a plan to reduce the province’s debt and diminish the number of dollars eaten up each year in interest payments.

Furthermore, he must resist the temptation to throw money at narrow interests who scream loudly and instead focus on broad-based approaches – low taxes, high quality education, and good infrastructure – that will make the Island a ripe environment for increased investment, productivity enhancement, and good jobs.

Looking into the longer term, we hope that the new Ghiz government will take a page from another new, young, Liberal premier – Shawn Graham of New Brunswick – and embrace the goal of a future Prince Edward Island that is self-sufficient.

Mr. Sheridan, let’s hope you make a great first impression on Tuesday – for all the right reasons.

Ian Munro is the Director of Research at the Atlantic Institute for Market Studies (AIMS), a non-partisan public policy think tank based in Halifax.