‘Punitive’ luxury tax panned by Scotiabank economists

The Liberal government’s proposed luxury tax threatens a fragile market for expensive cars, a report from Scotiabank says.

A “surge” in luxury auto sales from 2010 to 2017 came to “an abrupt halt” in 2018, the report released earlier this week says, as falling home prices hit household wealth.

Low interest rates and a recovering housing market led to a rebound in luxury sales over the past three months, but government policy may be the next headwind, according to Scotiabank Economics authors Rebekah Young and Raffi Ghazarian.

The Liberals proposed a 10% tax at the point of sale on purchases of personal automobiles, boats and aircraft valued at $100,000 or more. The NDP, which holds the balance of power in the Liberal minority government elected Oct. 21, proposed a 12% levy on the same items.

The Liberals said the tax would bring in an estimated $585 million in 2020-21; the NDP’s rate would generate $668 million.

“This rides a wave of left-leaning proposals on both sides of the border pitching various wealth tax proposals,” the Scotiabank report says.

The NDP also proposed a 1% annual tax on wealth exceeding $20 million, while Democratic presidential contender Elizabeth Warren would impose a 2% annual tax on household net worth between US$50 million and US$1 billion, above which it would rise to 3%.

Scotiabank says the economic argument for a wealth tax is “dubious,” as it creates “an artificial distortion in purchase decisions.” Canadians already pay sales taxes on luxury car purchases, using income that’s been taxed at a high marginal rate, the report says.

B.C.’s luxury tax, introduced in April 2018, contributed to a sharp reversal in luxury car sales from 10% year-over-year growth in 2017 to a 5% contraction in 2018, Scotiabank says.

The report calls the proposed federal tax “punitive.”

“These vehicles are not inherently a sin purchase, nor do they create negative externalities that would warrant government intervention to curb purchases,” it says.

“In fact, local purchases benefit regional economies, while the luxury segment is a seedbed for innovation that trickles down to the rest of the sector.”

An increase to broad-based consumption taxes would more efficiently raise revenues, creating the possibility for a broader wealth distribution, the report argues.

A hike to the GST or HST would, presumably, be less politically palatable to the governing Liberals, though, and their pledge to ask “the wealthiest Canadians to pay a little bit more.”

The parliamentary budget officer said revenue estimates for the luxury tax were highly uncertain, as sales of luxury goods are sensitive to economic conditions and buyers may switch to cheaper items.