The government’s tax reform package is based on the belief that income tax cuts have the power to provide a strong stimulus to the provincial economy, and thus are considered self-financing. “Not only is there little to no empirical evidence to support this belief and key objective of the tax reform package, there is significant evidence to counter this contention and other claims about the impact of these tax reforms,” say the authors of a report released by the Canadian Centre for Policy Alternatives-Nova Scotia.
In The Fiscal and Economic Implications of Tax Reform in New Brunswick, University of New Brunswick economist Joe Ruggeri, along with economist and Dalhousie University doctoral student, Jean-Philippe Bourgeois, systematically review the changes to the income tax system in New Brunswick implemented by the Liberal government in 2009.
The authors contend that New Brunswick tax reform is ineffective as an economic development tool, is regressive and ultimately unsustainable. As Ruggeri points out, “Stimulating provincial economic activity in the presence of national and international competition requires well-designed and properly targeted policies, not blunt instruments such as across-the-board tax cuts.”
A central objective of the tax reform is to encourage businesses already in New Brunswick to expand their investment in the province. According to Bourgeois, “they chose to lower taxes despite evidence that lower taxes did not give them a comparative advantage. To lower taxes even further only feeds an unsustainable race to the bottom, sacrificing any attempt at inter-provincial cooperation.” As the authors explain, the ratio of fixed investment to GDP in New Brunswick is lower than the national average despite the fact that the effective tax rate on additional investment was already below the national average prior to 2009.
Reducing personal income tax rates in the hope of attracting workers also flies in the face of evidence that shows changes in after-tax wages have little impact on interprovincial migration and immigration. For workers earning the average wage, the reduction in income tax rates implemented is equal to an increase in the weekly wage of less than $8, which is hardly an enticing amount to encourage more workers to enter the labour force or to migrate to the province. The reality is that workers move their residence when they find higher-paying jobs and careers that are more rewarding. To generate any sizeable effect on hours of work, the tax reduction would need to be focused on lower income workers; the tax reform package did exactly the opposite.
This reform is also regressive because it increases after-tax income disparities by disproportionately benefiting high-income New Brunswickers, as well as large corporations. According to this study, income tax reform provides $722 in tax savings for the average family in constant 2006 dollars. However, at the low end of the income scale, families with an average income of $12,914 will receive a tax reduction of $24, which is 1/30 of the average tax reduction. At the other end of the income scale, families with income above $300 thousand, with an average family income of $559 thousand, will receive a tax reduction of $24,029, which is 33 times the average.
In addition, regressive tax reform has the potential to widen the urban-rural economic gap. To the extent that incomes are higher in the urban centers, the greater tax savings for higher income taxpayers, which are concentrated in the urban areas, will add a fiscal incentive to the economic forces of rural depopulation.
The authors ultimately conclude that the tax reform is unsustainable because it aggravates the province’s precarious fiscal position in a permanent way. The provincial budget is in a substantial deficit position and this deficit is not the just the result of the recent economic downturn. It is structural, and will not be eliminated though economic expansion.
The authors recommend that the new Conservative government stop implementing the remaining stages of the Liberal tax reform. Indeed, from a fiscal-sustainability perspective, a roll-back of the entire tax reform would be preferable. Because the public debt in New Brunswick is already high and the deficit is structural, the authors recommend an independent study of the New Brunswick’s long-term fiscal prospects. This study should evaluate the spending pressures arising from population aging and the revenue streams that could be generated by alternative tax structures. It should also consider explicitly the equity effects of any proposed tax changes, focusing on different income classes, family types and gender.
We acknowledge that this government is undertaking prebudget consultations including via an online questionnaire and meetings in ten communities across the province. However, with such short notice, and the limitations of online questionnaires, New Brunswickers deserve more meaningful ways to contribute to their economic future.
To download a free copy of the report, The Fiscal and Economic Implications of Tax Reform in New Brunswick, go to www.policyalternatives.ca.