SIMPLER, LOWER, AND FLATTER II

Transcription

1 SIMPLER, LOWER, AND FLATTER II A Submission to the Alberta Business Tax Review Committee News Release Appendices Prepared by: Canadian Taxpayers Federation Alberta Division Telephone: (780) Facsimile: (780) Web: taxpayer@oanet.com Mitchel Gray Provincial Director May 31,

2 About the CANADIAN TAXPAYERS FEDERATION The Canadian Taxpayers Federation (CTF) is a federally incorporated, non-profit, non-partisan, educational and advocacy organization, founded in Saskatchewan in In ten short years it had grown to become a national organization with 80,000 plus supporters nation wide. The CTF s three-fold mission statement is: (1) To act as a watchdog on government spending, and to inform taxpayers of governments impact on their economic well-being; (2) To promote fiscal and democratic reforms, and to advocate the common interests of taxpayers; (3) To motivate taxpayers to exercise their democratic responsibilities. The CTF maintains a federal office in Ottawa and offices in the five provincial capitals of Ontario, Manitoba, Saskatchewan, Alberta and British Columbia. Provincial offices conduct research and advocacy activities specific to their provinces in addition to acting as regional organizers of Canada-wide initiatives. The CTF s official publication, The Taxpayer, is published six times a year. CTF offices also send out weekly Let s Talk Taxes commentaries to more than 800 media outlets nationally. The CTF staff and Board of Directors are not permitted to hold memberships in any political party. The provincial office in Alberta is located at: Canadian Taxpayers Federation Suite 410, Street Edmonton, Alberta T5K 2L9 Telephone: Facsimile: taxpayer@oanet.com Web site: 2

3 Contents Executive Summary 1 Introduction 2 Alberta s Business Taxes: Everyone Pays 3 Corporate Income Tax 4 Insurance Corporations Tax, Financial Institutions Capital Tax, Hotel Room Tax 8 Fuel Tax 9 Business Property Taxes 11 Conclusion 13 Appendix I U.S. Gasoline Tax Rates 16 3

4 EXECUTIVE SUMMARY Main Findings Alberta s corporate tax rates are not competitive in international terms and will soon cease to be competitive within Canada itself. Small business tax rates will soon cease to be competitive on an interprovincial basis. Alberta s complicated business tax system consists of a patchwork of various taxes that sacrifice economic efficiency for political expediency. Alberta s gasoline taxes are not competitive with those found in the United States our key trading partner and largest competitor for investment. The province s non-residential property tax rate is unfair to businesses and economically inefficient. CTF Recommendations The province should reduce both the general corporate income tax rate and the manufacturing and processing rate to 8 percent over 5 years. Alberta should reduce the small business tax rate to 4 percent and double the income threshold of the small business corporate income tax rate from $200,000 to $400,000 over 5 years. The province should eliminate the Insurance Corporations Tax, the Financial Institutions Capital Tax and the Hotel Room Tax. Alberta should reduce its gasoline tax rate by 5 cents per litre over a 5-year period and lobby the federal government to match the province s cut. The non-residential education property tax rate should be lowered, over a 5- year period, to $6.77 per $1,000 of equalized assessment, thus creating one single education property tax rate. 4

5 Introduction In the spring of 1998 the Canadian Taxpayers Federation (CTF) proposed a new personal income tax system for Alberta. The CTF recommended a simpler, lower and flatter tax model that would be de-linked from federal tax and re-indexed to inflation. Above all, the new system would provide a large tax cut for all Albertans irrespective of income or family status. In its 1999 budget, the provincial government adopted the Federation s recommendations and announced the introduction of a new single rate tax system. The new plan would reduce complexity by eliminating both the province s surtax and flat tax on income. Simplicity would also be enhanced by way of a single rate accompanied by a large basic personal exemption to retain an element of progressivity. Finally, the overall tax burden borne by Albertans would be lowered, saving individuals and families thousands of dollars. The savings have been extended even further since the initial announcement with the government reducing the proposed rate from 11% to 10.5% and increasing the basic exemption to $12,900 from $11,620. This new system will lead to a more productive economy, increased government revenues, an improved standard of living, and an enhanced degree of freedom for Albertans. As go personal taxes, so should go business taxes. If simpler, lower, and flatter is a recipe for a successful personal tax system, should not these same criteria be applicable to Alberta s business tax system? The Canadian Taxpayers Federation certainly thinks so. Why do we impose special levies on particular businesses or industries while providing others with special treatment through exclusive tax credits, exemptions, rates and deductions? The current complex, costly, and politically driven business tax system is unfair to many businesses and distorts the natural efficiencies of the marketplace. In our opinion, the purpose of the tax system should be to calculate and collect taxes in the fairest, most efficient way possible for the operation of government. The tax system should not be used as a means to other political or social ends. 5

6 To this end the CTF proposes creating the simplest, lowest, and flattest business tax regime possible. We recognize, however, that the existing system posses a significant problem in leveling the playing field without increasing taxes for some businesses. No business should have to pay more taxes under a reformed system. It is around this basic tenet - that the system should be made simpler and flatter while lowering taxes for everyone that the CTF has formed its recommendations for the Committee. Alberta s Business Taxes: Everyone Pays Corporations do not pay tax. Individuals pay tax. This is true because a corporation is simply a collection device by which governments tax the income of the owners of a business. But that does not necessarily mean that it is the owners themselves who suffer a financial loss. For while it is the owners who remit the tax to various governments, it is also the owners who pass this business cost on to consumers through higher prices and to workers in the form of lower wages. Invariably, some of the tax costs are also absorbed by stockholders or owners of capital through depressed rates of return, which further impedes growth by depressing investment and employment. Corporate taxes impose further efficiency problems because they constitute double taxation. Businesses, for instance, pay their taxes and then pay dividends to shareholders that are then taxed a second time. Capital gains are treated in the same way with a company s retained earnings being subjected to corporate income tax and then subjected again to personal capital gains taxes. In Canada, we offset double taxation, in part, through the dividend tax credit and through the inclusion rate for capital gains. So, in the end, everyone pays business taxes. Corporate income tax, capital taxes, business property taxes, and every other tax paid by Alberta companies are absorbed by the province s citizens. Giving Albertans a tax break, then, also involves cutting 6

7 taxes imposed on business. We can all profit from a low business tax environment. And the best place to start is with corporate income tax. Corporate Income Tax Alberta is falling behind. While the country s two biggest corporate tax players the federal and Ontario governments have been working toward substantive corporate tax reductions, the province of Alberta has been standing still. Ottawa s five-year tax reduction plan will lower corporate income tax rates to 21 percent from 28 percent on small business income between $200,000 and $300,000. The rate will also be reduced to 21 percent for all business income not currently eligible for special tax treatment. 1 Still more impressive is the Queen s Park proposal. Ontario will be doing with its corporate income tax regime what Alberta has already done with its personal income tax system namely, making the structure simpler, flatter, and lower. A single overall corporate tax rate of 8 percent will eventually replace the general rate that, at the beginning of 2000, stood at 15.5 percent, and the manufacturing and processing rate that came in at 13.5 percent. The small business tax rate will also be cut in half from 8 percent to 4 percent. At the same time, the income threshold at which the small business deduction begins to be phased out will increase to $400,000 (from $200,000) and the threshold at which the rate is phased out entirely will move to $1 million. 2 Alberta has little choice but to follow Ontario s lead. While low personal income taxes and the lack of a provincial sales tax make doing business in Alberta an attractive prospect, it is corporate income taxes that have the biggest impact on a business 1 Government of Canada, The Budget Plan 2000, pp Government of Ontario, 2000 Ontario Budget 7

8 bottom line. If Alberta is to remain competitive nationally, let alone internationally, it must flatten and reduce general corporate income tax rates. RECOMMENDATION: The province should reduce both the general rate and the manufacturing and processing rate to 8 percent, lower the small business rate to 4 percent and double the threshold for the small business deduction to $400,000. This reduction should occur over a five-year period. A combined federal/provincial tax rate in the 30 percent range would be competitive with the OECD average of 34 percent. International Corporate Income Tax Rates January % 45% 40% 35% 30% 44.6% 33% 36.7% 42% 35% 28% 30% 40% 25% 24% 20% 16% 15% 10% 5% 0% Canada China France Hong Kong Ireland Japan Mexico Sweden United Kingdom United States Source: KPMG Corporate Tax Rate Survey, January 2000 Such a reduction would follow the 1996 federal Technical Committee on Business Taxation s main recommendation to reduce the combined rate to 33 percent from an average of 43 percent while implementing a regime that would be more neutral among 8

9 businesses. A more recent proposal from the C.D. Howe Institute recommends even deeper cuts to a rate of 30 percent by 2004 once again, consistent with Ontario s rate reduction plan. 3 Rate reductions are unlikely to have a long-term negative impact on revenues. Revenues in Ireland, for example, fell in 1988, (immediately after cuts were implemented in the 1987 Programme for National Recovery) but quickly rebounded so that, by 1989, real revenues exceeded those prior to the tax cuts. 4 Ireland had the highest growth among OECD nations in per capita income in the 1990s and continues to attract investment with a planned 12.5 percent corporate tax rate for all business activities. 5 38% Ireland Corporate Tax Revenue and Corporate Tax Rates $6.0 36% 36% $5.5 $5.5 34% 32% 32% $4.7 $5.0 $4.5 30% 28% 26% 24% $2.9 $3.6 28% 24% $4.0 $3.5 $3.0 Corporate Tax Rates Corporate Tax Revenues 22% $2.5 20% * 2000 * Source: Ireland Ministry of Revenue, Irish Central Statistical Office, Irish Economic and Statistics Research Institute (* 1999 and 2000 estimates) $2.0 3 Jack M. Mintz, Why Canada Must Undertake Business Tax Reform Soon, (Toronto: C.D. Howe Institute, 1999) p Fred McMahon, Road to Growth, (Halifax: Atlantic Institute for Market Studies, 2000) p Mintz, p. 4. 9

10 Most recently, Ontario s experience with dropping personal income tax rates by more than 30 percent has produced increased revenues. Personal income tax revenues have gone from $14.8 billion to $17.5 billion since the Harris administration took power. Ontario Personal Income Tax Revenues and Personal Tax Rates * 60.0% % % % 49.0% % 45.0% Personal Income Tax Rate Personal Income Tax 39.5% % % % * 2000 * 16 Source: Budget Data, Ontario Budget documents (* 1999 and 2000 estimates) Neither are corporate tax revenues likely to decline as a result of an increase to the small business deduction threshold. Moving from $200,000 to $400,000 would, in fact, most likely increase corporate tax revenues. This would be due to the fact that it would be more profitable for the owner of a business to have the full $400,000 taxed at the small business rate rather than at higher personal tax rates. Revenue impacts aside, Alberta must reduce corporate income tax rates to remain competitive. In a high-tech world where capital (including small business capital) can move in the blink of an eye to greener, more tax-friendly pastures, Alberta must do all that it can to protect its turf. 10

11 Insurance Corporations Tax, Financial Institutions Capital Tax, Hotel Room Tax The Insurance Corporations Tax, the Financial Institutions Capital Tax and the Hotel Room Tax are paid by certain businesses in addition to corporate income tax. Why? Why are some businesses forced to pay additional taxes simply because they happen to operate in a particular industry? There seems to be no good answer. The Financial Institutions Capital Tax, for example, was put in place in 1990 simply because Alberta had no such tax. According to Treasurer Dick Johnston at the time: Alberta is the only province which does not levy a tax on the capital of financial institutions Therefore, as part of our deficit reduction plan, a 2% tax on the capital of financial institutions will be introduced 6 To be fair, Johnston did specify that the tax was to be used to eliminate the province s deficit. The Hotel Room Tax was also fashioned as a deficit elimination tax when it was introduced in Neither tax, of course, did anything to abate the deficit as the Getty administration continued to wreak havoc on the province s balance sheet. The Klein administration did, finally, eliminate the deficit in , but both taxes remained to penalize Albertans. It would appear, then, that these industry-specific taxes remain in place primarily because they involve little political cost to the government. Most individuals do not see the direct impact on their personal finances, as they do, for instance, with respect to personal income taxes. Some individuals may even feel that big corporations should pay an additional big corporations tax. 6 Dick Johnston, 1990 Budget Address, (Edmonton: Government of Alberta, 1990), p

12 As remarked earlier, however, it is not the corporations, but individual Albertans who end up paying these taxes. The cost of such taxes is simply passed on to consumers in the form of higher interest rates, higher service charges, higher insurance premiums, and higher hotel room bills, not to mention the additional costs of administration that accompany such a complicated regime. RECOMMENDATION: As part of its effort to simplify, flatten, and lower Alberta s taxes, the province should eliminate the Insurance Corporations Tax, the Financial Institutions Capital Tax, and the Hotel Room Tax over a five year period. Fuel Taxes Unlike corporate tax rates, Alberta s fuel taxes remain low when compared to the other provinces. In fact, Alberta has the second lowest fuel tax in the country at 9 cents per litre (Yukon is the lowest at 6.2 cents per litre). Neither does the province have a sales tax (other than the GST) imposed on the purchase price. This constitutes a competitive advantage for Alberta businesses within Canada s borders. Alberta also has an excellent track record, when compared to other provinces, with respect to allocating fuel taxes to road construction and highway maintenance. Depending on the year and the method of calculation, Alberta spends anywhere between 70 percent to 170 percent of its fuel taxes through its Ministry of Infrastructure. Fuel taxes are generally applied for the purpose of roadway development, as they should be. Unfortunately, Alberta must compete, not only with Canada s other provinces but, perhaps more importantly, also with the United States. The U.S. is, after all, Canada s primary trading partner and the most prominent competitor for business investment. Although Tax Exempt Fuel Use rules and the Alberta Farm Benefit Program and Farm Fuel Distribution Allowance provide a fuel tax break to some businesses and industries, a large portion of Alberta s business community must pay taxes at more than double the 12

13 rate of their U.S. rivals. The U.S. federal tax is only 1.7 cents per litre (in Canadian dollars), while the average state tax is 7.6 cents per litre (again, in Canadian dollars) for an average total tax of 9.3 cents per litre. (See Appendix I for a complete list of state fuel taxes). Compare that to the 19 cents per litre Alberta companies are paying and it doesn t take long to figure out that industries with fixed transportation costs are at an extreme disadvantage. Gasoline Tax Rates, Federal and Alberta Federal Excise Tax (cents/litre) Fed Sales Tax N.A. N.A. N.A Alberta Fuel Tax (cents/litre) Federal Excise Tax (cents/litre) Fed Sales Tax Alberta Fuel Tax (cents/litre) Source: Natural Resources Canada, Historical Gasoline Prices, RECOMMENDATION: In order to counteract the damage this rate discrepancy causes, the provincial government should reduce its gasoline tax rate by 5 cents per litre over a 5-year period and lobby the federal government to match Alberta s cut. A 10 cent per litre fuel tax cut would put Alberta s businesses on a level playing field with their American counterparts. Even if the federal government does not act, the province must work toward doing its share to curtail the high costs of fuel prices faced by businesses. 13

14 Such a reduction could be phased in over time to avoid substantial and immediate revenue loss. As with corporate taxes, however, a cut in the rate will inevitably lead to increased revenues as investment expands and profits are poured back into increased fuel purchases. Business Property Taxes Perhaps the most logical thing to do with Alberta s School Property Tax would be to get rid of it altogether. This, in fact, was one of the recommendations contemplated by a government appointed committee early in The Committee, examining the residential portion of the tax, is reported to have suggested that as provincial debt servicing costs are reduced, a portion of the savings could be applied to each year s residential requisition, phasing out the tax over a period of up to 20 years. Education would then be funded out of general revenues. 7 The proposal makes sense because the current system is riddled with complexity, inequity, unpredictability and political-infighting. The system, particularly after the introduction of market value assessment, has led to a situation where many taxpayers in rapid growth areas feel that they are paying more than their fair share. Equally as important, for homeowners and businesses alike, is the fact that the ability to pay (or one s income) is not in linked to the value of the property. Businesses must pay their property taxes whether they make money or not. In this sense, property taxes, which are profit-insensitive, can be far more detrimental to growth and investment than corporate taxes that are profit-sensitive. This is particularly true for businesses with fluctuating cash flow, small businesses with slim profit margins, and start-up companies that require some time to become profitable. 7 Ashley Geddes, Gov t panel eyes property tax break: Savings from debt reduction could do away with education tax, it says, Edmonton Journal, (Edmonton: February 23, 1999) p. A1. 14

15 But the question of profit sensitivity is only part of the problem with respect to property taxes. There is also a question of fairness and equity within the property tax system. Why, for instance, are businesses forced to pay a higher mill rate than residential property owners? Why does the province complicate the tax system with two different rates? Why are some businesses forced to subsidize homeowners and other businesses singled out for special treatment? The answer, of course, is that businesses don t vote in elections residents do. Residential properties receive a lower mill rate chiefly, if not exclusively, because of political reasons. It is much easier, from a political perspective, to keep rates high on a relatively small number of businesses than on a large pool of individual voters. The fact that businesses pay a mill rate of $9.94 per $1,000 of equalized assessment while the rate for residential property is only $6.77 is particularly galling considering businesses receive no direct service for this charge. While homeowners receive a significant service in the form of an education for their children, the benefits accruing to businesses from the tax are highly intangible. It should also be noted that the lower mill rates are in addition to the already favorable treatment accorded homeowners in the income tax system capital gains on a principle residence are not taxed nor is the imputed income from homeownership. There is, in fact, evidence to suggest that, for the purposes of economic efficiency, nonresidential rates should be lower than residential property taxes. For example, Grieson (1974) argues that property taxes should be higher on those components of the tax base that are least elastic in supply. Since capital tends to be more mobile than people, efficiency arguments dictate that business property (especially industrial uses) should be treated more lightly than residential property. Thrisk (1982) found that the efficiency cost of the property tax would be reduced if effective tax rates were higher on residential properties 15

16 because residential owners are much less mobile and thus a higher rate would be less distortionary. 8 RECOMMENDATION: Making Alberta s tax system simpler, lower, and flatter, not to mention fairer, requires a reduction in the non-residential education property tax mill rate. The rate should be lowered, over a 5-year period, to $6.77 per $1,000 of equalized assessment, consistent with the residential rate. One single education property tax rate should then take effect with a view to lowering the rate over time. Once again, a lowering of the mill rate would not necessarily translate into a corresponding reduction in overall revenues. Mill rate reductions in the past have been associated with accompanying revenue increases. Education requisitions, for instance, rose 10.5 percent from while the mill rate dropped by 10.7 percent over the same period of time. 9 Tax cuts can and do produce higher revenues. Conclusion The Canadian Taxpayers Federation feels that Alberta s business taxes should be made simpler, lower and flatter. To this end we propose the creation of a single corporate tax rate of 8 percent through reductions in both the general and manufacturing and processing rates. This reduction should take place over a period of five years to allow for revenue replacement. The threshold for the small business deduction should be increased from $200,000 to $400,000 and the rate decreased to 4 percent in order for increasingly mobile small businesses to compete with those in other jurisdictions, most notably Ontario. 8 Harry M Kitchen and Enid Slack, Business Property Taxation, (Kingston: Government and Competitiveness School of Policy Studies, Queen s University, 1993) p Municipal Affairs Assessment Services 16

17 The Insurance Corporation Tax, the Financial Institutions Capital Tax and the Hotel Room Tax should also be eliminated, in accordance with the principle of a single tax rate. The Gasoline and Diesel Fuel Tax rate should be lowered by 5 cents per litre in order to bring Alberta in line with taxes paid by competing American businesses. Finally, in the interests of simplicity, fairness, and economic efficiency, the nonresidential School Property Tax mill rate should be lowered to that of the residential rate -- $6.77 per $1,000 of assessment. These recommendations bring with them an estimated annual tax saving of $1.5 billion (in 2000 dollars) when fully phased in. Estimated Annual Savings from Proposed Business Tax Cuts (in millions) Corporate Income Tax General Rate M & P Rate Small Business Rate Insurance Corporations Tax Life, Accident, Sickness Other Financial Institutions Capital Tax First $400,00 million of Taxable Capital Over $400,00 million of Taxable Capital $873 $649 $156 $68 $127 $34 $93 $38 $5 $33 Hotel Room Tax $47 Fuel Tax $293 School Property Tax $162 Total $1,540 Source: Canadian Taxpayers Federation 17

18 This may, at first, appear to constitute a fairly large tax savings. Annual savings over a 5-year phase-in period, however, would likely only average just over $300 million yearto-year. Moreover, the cuts would be off set by total revenue growth (assuming a modest 10 percent positive change in total revenue growth over the 5-year period). Tax cuts of this magnitude are necessary for the province to retain the Alberta Advantage. They are necessary to attract business to the province and to allow businesses already in the province to compete on a level playing field in inter-provincial and international markets. Most importantly, however, business tax cuts are necessary for the welfare of individual Albertans. Business tax cuts will mean a greater number of higher paying jobs for Albertans. The province s citizens will also benefit from lower prices and more disposable income. Finally, individual Albertans stand to see increases in core funding areas such as health care and education as lower tax rates bring in higher revenues. Business tax cuts are not just good for business they are good for all of us who call Alberta home. 18