Reform provincial sales tax system, C.D. Howe suggests

The provinces should stop taxing corporate income, the C.D. Howe Institute recommends, and instead hand over those duties to Ottawa.

In a paper released Thursday, called “Recalibrating the Federal Balance,” the economic think-tank notes that capital income is far too mobile for Canadian provinces to tax it efficiently, not just inter-provincially, but also internationally.

“As matters stand, levying taxes on corporations is an expensive undertaking for provinces; consequently, a shift to a fully coordinated federal corporate base looks more likely than a shift in the opposite direction,” the paper states.

In exchange, the provinces should concentrate on consumption taxes, such as excise and so-called “sin” taxes (alcohol, tobacco and gambling). These are suitable provincial taxes, C.D. Howe believes, since they cause less economic harm than corporate taxes.

“The economic benefits of a reorganization in tax collection would be especially large for provinces that currently use retail sales taxes and agree instead to leverage VAT or harmonized sales tax.” Retail taxes place a heavy burden on local business investment because they do not permit the full tax paid on business inputs to be deducted or credited, the paper points out.

Still, the panel was divided on how such reforms would affect Canada’s political dynamic. Some panellists thought that incremental changes would rule out major reforms Ottawa might promote, while others argued that a steady pace of restructuring provincial and federal taxes was part of a natural “revamping” process that could avoid long blockages and circumvent federal-provincial bickering.

The panellists did appear to agree on one issue: They poured cold water on Ottawa’s suggestion that a portion of the federal surplus could be shifted to the Canada and Quebec pension plans.

They said that following this suggestion would improve the current generational imbalance — under which young Canadians will likely not benefit from the program as much as the current generation of seniors. However, political decisions to steer surplus money into pension funding could foreshadow future moves to use pension fund accumulations to pay for deficits, “which would undermine the [pension] fund’s principled independence from the political process.”

Filed by Doug Watt, Advisor.ca, doug.watt@advisor.rogers.com