A tax credit, not a tax cut
The Leader-Post (Regina)
Thu 22 Dec 2005
Page: B12

Section: Letters
Byline: Erin M. K. Weir
Source: The Leader-Post

The Saskatchewan business tax review committee proposes
to eliminate the corporate capital tax for all private businesses except
financial institutions and to cut the corporate income tax rate from 17 per cent
to 12 per cent. In arguing for these recommendations, the committee overstates
the magnitude of current corporate taxes, fails to link business investment to
business taxes, ignores the equalization program, and neglects to seriously
consider a tax credit as an alternative to tax cuts.

The committee emphasizes that Saskatchewan's corporate capital tax rate of
0.6 per cent exceeds the rates of most other provinces. For example, Ontario,
Quebec (by 2009), and New Brunswick have rates of 0.3 per cent. However, the
committee barely mentions Saskatchewan's $20 million corporate capital tax
exemption, which far exceeds the exemptions of about $5 million provided by
other provinces and makes Saskatchewan's present corporate capital tax
reasonably competitive.

A business with $35 million of capital would pay $90,000 of corporate capital
tax, whether based in Saskatchewan (i.e. 0.6 per cent of $15 million) or in a
typical province (i.e. 0.3 per cent of $30 million). Smaller businesses pay less
corporate capital tax in Saskatchewan than in a typical province.

Saskatchewan's taxes may be uncompetitive for large, capital-intensive
businesses. But these firms are located in Saskatchewan for specific reasons,
such as the presence of natural-resource deposits, and cannot necessarily
relocate in pursuit of lower tax rates. Relatively few Saskatchewan businesses
have more than $35 million of capital. It would be prudent to study these firms
and their relative mobility before abolishing the corporate capital tax for the
sake of competitiveness.

Saskatchewan has among the lowest business costs, including taxes, in North
America. Businesses that can locate in Saskatchewan already have ample incentive
to do so. If there is a lack of business investment in Saskatchewan, it must be
due to factors other than taxes.

In the wake of federal corporate-tax cuts, Canadian business profits have
been rising, but Canadian business investment has been falling. One cannot
assume that further corporate tax cuts and even higher business profits would
increase investment in Saskatchewan.

The business tax review committee believes that lower corporate tax rates
will also induce businesses to report more of their capital and income in
Saskatchewan for tax purposes. The C. D. Howe Institute estimates that, largely due to such tax
shifting, the provincial government "will recover about one-half of the revenue
loss associated with the reduction in the statutory corporate income tax rate."

The reporting of additional corporate income would increase Saskatchewan's
revenues at the reduced corporate income tax rate, but would reduce its
equalization entitlement at the greater national-average corporate income tax
rate. The reporting of additional corporate capital after the corporate capital
tax's elimination would yield no revenue, but would reduce the province's
equalization entitlement at the national-average corporate capital tax rate.

The C. D.
Howe Institute's
optimistic forecast could prove accurate only if Saskatchewan remains a "have"
province with no equalization entitlement. If fluctuating commodity prices
and/or proposed changes to the equalization system give Saskatchewan an
equalization entitlement, the province would stand to lose more than it would
gain from each additional dollar reported in Saskatchewan.

Although increased reporting may be undesirable, real investment is needed to
create new jobs and raise the productivity of existing jobs. However, the
business tax review committee advocates tax cuts for existing capital that has
already been invested and is no longer mobile between jurisdictions. Exempting
Saskatchewan's accumulated stock of private capital from taxation by eliminating
the corporate capital tax is an exceedingly costly means of providing a tiny
additional incentive (worth 0.6 per cent annually) for new capital investment.
If the goal is to promote investment, why not focus tax-reductions on new
capital?

Rather than eliminating the corporate capital tax, the Saskatchewan
government could create a tax credit for investment deductible against corporate
capital tax liabilities. To promote investment by businesses that do not have
enough existing capital to pay corporate capital tax, the credit could be made
refundable. This approach would reduce taxes not in proportion to a business's
accumulated capital stock, but in proportion to its investment of new capital in
Saskatchewan.

Saskatchewan's corporate taxes are not out of line with those of most other
provinces. Recent federal corporate-tax cuts have not increased business
investment in Canada. Inducing businesses to report more capital and income in
Saskatchewan could do more harm than good. A tax credit would provide more
incentive for investment in Saskatche-wan at less cost than the tax review
committee tax cuts, leaving the province with more funds to finance
economic-development initiatives and other important public priorities.

Erin M. K. Weir

Weir is author of Money for Nothing (available at www.policyalternatives.ca),
a response to the BTRC's final report. This letter expresses his views rather
than those of his employer, the Government of Canada.

Ottawa

Edition: Final
Story Type: Letter
Length: 806
words