FREDERICTON – As Finance Minister Victor Boudreau prepares to release a discussion paper on how to revamp the province’s taxation structure, he should look to eliminating targeted tax credits and replace them with a universal income tax rate, say numerous policy leaders.
New Brunswick has lots of room to improve the way it collects tax from families and businesses, suggest experts.
There are also options to increase one form of tax to offset another tax that would have a more profound effect on creating jobs, they said.
For example, increasing consumption tax would also make more money available to offer broad tax relief to families and employers.
“There’s a lot of room in most provinces to be aggressively reducing tax burdens on people,” said Niels Veldhuis of the Fraser Institute.
For example, a flat tax would eliminate the different rates New Brunswickers pay depending on their salaries. Instead, all New Brunswickers and businesses would pay a single tax rate.
The Fraser Institute suggests New Brunswick should set a flat income tax rate of 10.2 per cent — the province’s lowest tax rate — for both corporations and individuals. The basic personal exemptions would remain the same.
Creating a flat tax would simplify the process to such a degree that an individual or company’s tax return would be one page, said Veldhuis.
“You would completely eliminate the (distortional) effects of the current tax system that penalize people for working hard, they penalize people for saving and investing and they penalize the heart of the economy which are the entrepreneurs,” said Veldhuis. “You eliminate all the special interest groups that try to use the tax system to their advantage.”
No provinces have a true flat tax. However, Alberta has a single rate for personal income tax. Provinces can’t reap the full benefits of a flat tax until the federal government adopts a similar system, said Veldhuis.
Twenty nations use a flat tax system, he said.
New Brunswickers are still feeling the impact of Boudreau’s last budget where he introduced across-the-board tax hikes.
The auditor general’s report, released last month, stated the province is collecting tax dollars at an unprecedented, and perhaps unnecessary, rate.
Earners in the first income bracket (less than $34,186) saw their tax rate jump to 10.12 per cent from 9.68 per cent.
The rate for the next bracket (up to $68,374) jumped to 15.48 per cent from 14.82 per cent. For example, a single-income family with no children and a taxable income of $40,000 pays an additional $42 in tax, taking their total bill to $2,562.
Employees earning up to $111,161 saw their tax rate increase to 16.8 per cent, up from 16.52 per cent. For example, a single-income family with no children and a taxable income of $80,000 pays an additional $228 in tax, taking their total bill to $8,889
Those earning more than $111,161 pay 17.95 per cent, up from 17.84 per cent.
The small business tax rate increased to five per cent from 1.5 per cent, while corporations saw their rate jump to 13 per cent from 12 per cent.
The province has hired well-known taxation expert Jack Mintz, the chair of the University of Calgary’s School of Policy Studies, to consult government as it prepares its discussion paper.
The document will be released in April and will focus on all aspects of the taxation system including personal income tax, corporate tax, property tax, consumption tax and fuel tax.
A legislative committee will be appointed to consult with New Brunswickers over the summer and present recommendations to government in the fall.
Boudreau said it’s his intention that changes to the tax structure could be in place in time for his next budget.
But there’s another factor government must consider when shifting the tax structure, especially given some skepticism on the part of New Brunswickers given last year’s tax hike, say policy experts.
“There’s the underlying economic reality and then there’s the political and on-the-street appearance of things,” said Ian Munro, director of research for the Atlantic Institute for Market Studies. “If a shift results, for example, in the HST going up by a point we’d hope to see that other taxes are going down by an equal or greater amount.”
Although New Brunswickers likely have little appetite for an increase in a tax that helps everyone — such as sales tax — to offset a decrease in a business tax, Munro said eventually individuals end up paying a company’s tax bill anyway through high prices or lower wages.
Munro said it makes more sense to increase HST rather than fuel tax which is more like a user payment given that only those who drive pay the tax.
“Drivers who benefit from the use of the roads are the ones who pay for it,” he said.
Rather than offer broad-based tax relief, the provincial government has instead favoured targeted tax relief and credits to certain sectors and groups of individuals.
That’s creating an unhealthy tax structure where government is choosing winners and losers, said John Williamson of the Canadian Taxpayers Federation.
“That’s absolutely the wrong way to go,” he said.
Mintz wouldn’t offer specifics on how N.B. should change its taxation policies, stressing those decisions must be made by government.
However, when visiting the province last year to speak with officials about taxation, Mintz urged Boudreau to cut corporate tax rates to attract outside investment and boost the economy.
He suggested cutting the 13 per cent corporate rate to five per cent. Since then, Premier Shawn Graham has said the province will follow the federal government’s suggestion of cutting the rate to 10 per cent and might be prepared to cut it more.
Mintz has also criticized the province’s myriad of tax credits aimed at helping specific clusters of businesses and individuals.
“I would agree that targeted tax credits don’t necessarily achieve what people think they achieve,” he said yesterday. “Part of the problem is these things get brought in and one doesn’t really know how effective they really are in achieving results.”
He pointed to Ireland as a jurisdiction that was able to dramatically turn its economy around by reducing corporate tax rates.
Governments still need to collect enough taxes to pay the bills, but tax reform doesn’t need to be expensive, Mintz said, pointing to cutting corporate tax rates.
“You have to think it through if you’re reforming tax, what things are going to have the biggest bang for the buck?” he said. “There may be some taxes you can increase to make up for the shortfalls that aren’t really going to have a negative impact on the economy. Changing the tax mix can be as important as anything else.”
Boudreau has also said the review will look at property taxes as homeowners are feeling cash-strapped from skyrocketing property assessments.
Munro said the existing property tax system could be construed as archaic. Determining an individual’s tax bill based on the value of their home rather than the services they receive doesn’t make sense.
Halifax recently commissioned a study that questions the link of the value of a home, services received and taxes paid, he said.
“If you have a house on that’s on a street with a sidewalk, you would be one of those that pays taxes that go to cover sidewalks,” he said. “If you live in some other part of the city where there are no sidewalks, you wouldn’t.”