2.17 Tax Expenditures. Introduction. Scope and Objectives

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1 Introduction Programs offered by te Province are normally outlined in te Estimates and approved by te Members of te House of Assembly as part of te annual budgetary approval process. However, te Province offers a number of programs wic use various tax revenues tat are not part of tis annual budgetary approval process. Tese deductions and exclusions reduce tax revenue oterwise due te Province and are commonly referred to as tax expenditures. Tax expenditures could be defined as foregone tax revenues, due to special exemptions, deductions, rate reductions, rebates, credits and deferrals tat reduce te amount of tax tat would oterwise be payable. Tax expenditures in our Province are used to provide financial assistance to certain groups of taxpayers or to provide economic incentives to encourage specific program initiatives. Tax expenditure programs ave comparable economic impacts as direct spending programs and affect te financial position of te Province in a similar manner. However, tax expenditure programs and direct expenditure programs are not presented to te House of Assembly in te same way in te annual budgetary approval process. Te Estimates provide detailed information on direct expenditure programs to te line item category level of expenditure and related revenue classifications. However, information included on current account revenues in statements and exibits sows te net amounts for eac revenue classification only. Tere is no information provided on foregone tax revenues. Scope and Objectives We performed a review of tax expenditure programs in place for te fiscal year 31 Marc Te objectives of our review were to: Identify te various tax expenditure programs in our Province and, were possible, obtain an estimate of te annual cost to te Province of te various tax expenditures; and Examine and assess te processes in place for te approval, monitoring, evaluation and reporting of Provincial tax expenditure programs. Auditor General of Newfoundland and Labrador 287

2 Conclusions Te Province offers a significant number of tax expenditure programs; owever, details of te impact of te various tax expenditure programs are not provided to Members of te House of Assembly as part of te annual budget approval process. We identified approximately $215.5 million of foregone revenue resulting from tese tax expenditure programs. Tax expenditures affect te financial position of te Province in te same way as direct expenditures under normal spending programs. Reporting tax expenditures to te House of Assembly would provide information tat te Members require in order to old Government accountable. Tere is currently no process in place to formally set target objectives for tax expenditure programs wic would facilitate te measurement and monitoring of te results of te programs against desired objectives. As a result, no information is provided to te House of Assembly on te effectiveness of tese programs. Findings and Recommendations Reporting Tax Expenditure Programs Based upon discussion wit officials of te Department of Finance and a review of available information, we identified various tax credits, benefits and rebates related to programs administered by te Department. Were possible, we obtained te latest available estimate of te annual cost to te Province of te various tax expenditures. We identified tese items in suc tax categories as personal income tax, corporation income tax, gasoline tax, ealt and post secondary education tax, provincial sales tax and tobacco tax. A summary of Provincial tax credits, benefits and rebates wit annual cost estimates identified during our review is contained in Figure Auditor General of Newfoundland and Labrador

3 Figure 1 Estimated Annual Impact of Tax Credits, Benefits and Rebates ($ Millions) Tax Category Personal Income Tax credits, benefits and rebates Estimated Annual Impact Non-refundable tax credit block: Basic personal amount 37.7 Age amount 9.7 Spouse or common law partner 14.8 Eligible dependent 6.0 Infirm dependents amount 0.1 CPP contributions 19.0 EI premiums 10.7 Pension income amount 3.6 Caregiver amount 1.0 Disability amount 1.7 Disability amount transfers 1.6 Interest on student loans 1.3 Tuition/education amounts 7.4 Tuition/education amounts transfers 6.8 Transfers from spouse or common- law partner 2.7 Medical expenses 5.7 Caritable donations 10.2 Total - non-refundable tax credit block tax year - final Oter tax credits: Dividend tax credit 5.0 Overseas employment tax credit 1.4 Foreign tax credit 1.2 Direct equity tax 0.2 Political contributions tax credit 0.1 Total - Oter tax credits tax year- final Auditor General of Newfoundland and Labrador 289

4 Figure 1 (cont.) Benefits and rebates: Newfoundland and Labrador cild benefit 8.2 Low income HST credit 6.0 Low income seniors benefit 7.5 Home eating fuel rebate 1.1 Total - benefits and rebates fiscal year - actual Total - Personal Income tax credits, benefits and rebates Corporation Income tax credits: Scientific researc and education tax credit 2.8 Film and video tax credit 1.0 Foreign tax credit and political contributions tax credit 0.1 Manufacturing and processing tax credit 10.6 Small business tax rate 17.2 Oter Provincial taxes: Total - Corporation Income tax credits tax year - preliminary Gasoline tax rebate fiscal year Gasoline tax exemption fiscal year EDGE refund tax year - final Sales tax rebate - Labrador ome construction fiscal year Tobacco tax - Labrador border zone rebate fiscal year Financial corporations capital tax 0.0 HAPSET Exemptions relating to te Provincial component of HST Not available Not available Total - Oter Provincial taxes 13.1 Grand total of tax expenditures Source: Department of Finance 290 Auditor General of Newfoundland and Labrador

5 As te Figure indicates, tax expenditure programs cost te Province $215.5 million and represent a significant amount of foregone revenue. Members of te House of Assembly would initially be aware of various programs as a result of te legislation being approved in te House of Assembly. Were a tax expenditure initiative is new, te budget document may provide an estimate of te amount of revenue foregone in te initial year of implementation. However, details of te impact of te various tax expenditure programs are not provided to Members of te House of Assembly as part of te annual budget approval process. Tree Canadian jurisdictions - Saskatcewan, Britis Columbia and te Government of Canada do disclose details of teir major tax expenditure programs in teir budget documentation. Figure 1 sows tat altoug tere are small business exemptions available under te Financial Corporations Capital Tax, tere are currently no amounts sown for businesses in te Province wic fall into te small business category. Terefore, officials sould consider weter tis program is acieving wat was originally intended. We selected te following tax expenditure programs to assess te processes in place for te approval, monitoring, evaluation and reporting of te program: Economic Diversification and Growt Enterprises (EDGE) Program; Film and Video Industry Tax Credit; Gas Tax rebates and exemptions; and Corporate Income Tax credits for small business, manufacturing and processing, and researc and development. Our review indicated tat tere is currently no process in place to formally set target objectives for tese programs wic would facilitate te measurement and monitoring of te results of te programs against desired objectives. For eac program we were informed tat, altoug results are tracked on an ongoing basis, internal program reviews occur only on an ad oc basis. As a result, no information is provided to te House of Assembly on te effectiveness of tese programs. We were informed tat tere is a planned accountability framework under review at te Newfoundland and Labrador Film Development Board, wic administers te Film and Video Industry Tax Credit. Te framework is intended to include establised objectives against wic actual performance could be measured and reported. Auditor General of Newfoundland and Labrador 291

6 Recommendations Te Department of Finance sould determine all of te Province s tax expenditure programs, compile information on eac of te programs and provide te information to Treasury Board Secretariat for inclusion in te Government s annual budget to te House of Assembly. Te department responsible for a tax expenditure program sould establis a process to set target objectives wic would facilitate te measurement and monitoring of te results of te programs against te desired objectives. Resulting performance against tese objectives sould be periodically reported to te House of Assembly. Department s Response Figure 1, wic purports to be a table of tax expenditures, includes a number of credits and deductions wic te Department considers to be part of te core tax system and sould not be classified as tax expenditures. Te Department of Finance agrees tat publication of an annual report of tax credits, deductions, benefits and rebates will elp to acieve greater accountability and transparency. Additionally, wile te effectiveness of tax expenditure programs are reviewed on an ad oc basis, te Department of Finance, in consultation wit relevant line departments, will consider means to formalize tis process. 292 Auditor General of Newfoundland and Labrador