What would they cut to pay for a tax cut in Nova Scotia?

April 18, 2006

In the runup to Rodney MacDonald's first budget, business lobby groups are pushing for more tax cuts.

The Canadian Federation of Independent Businesses (CFIB) has embarked on a campaign to improve the province’s "business climate" through tax reduction. The campaign’s message was echoed by three articles in the April 8 business section of The Chronicle Herald. In the articles, the CFIB, the Nova Scotia Chambers of Commerce, and business columnist Roger Taylor promote tax cuts as a means of supporting small businesses.

The campaign comes at a bit of an odd time, given that the business climate appears to be better that it has been in years. The province is experiencing a sustained period of economic growth. Business bankruptcies are at the lowest level in more than 15 years and have been steadily declining since they peaked in the mid-1990s. Jobs are being created and the provincial unemployment rate is lower than it has been in decades.

Less than a year ago, Halifax Chamber of Commerce president, Valerie Payn, in The Chronicle Herald’s Business Forum, responded to the question: "Is Nova Scotia competitive with the rest of the country?" She stated that, "If by competitive we mean from a business and financial perspective, the answer remains the same (we are competitive). We have a tax structure competitive with that of the rest of the country, and Halifax Regional Municipality’s cost-competitiveness is considered the best among mid-sized cities, according to a 2004 KPMG (an accounting firm) study."

The 2005 provincial budget already included tax cuts aimed at supporting businesses. The "small business tax threshold" was increased from $350,000 to $400,000, raising the point below which businesses are eligible for the lower, small-business tax rate. The large corporation tax rate was reduced from three per cent to 2.75 per cent and is scheduled to decrease to two per cent over the next two years. Nova Scotian taxpayers continue to receive federal income tax cuts implemented by the Martin government, and the new Harper government is planning a cut in the HST.

I suppose the initiative is not surprising, given that the Chambers of Commerce and the CFIB are business advocacy organizations – they are simply doing what they are designed to do: advocate on behalf of their members in the same way that unions and environmental organizations promote the interests of their members. The difference is that these business folks have clout with the provincial government. The Conservatives regularly make pre-budget announcements and other presentations to the Chambers of Commerce in the province. You don’t see finance ministers or the premier heading down to the union hall to present their plans for the economy.

A tax cut may be tempting for the new premier as he presents his first budget and considers a possible election. But the recent experience of the Hamm government suggests that Rodney MacDonald, and Nova Scotians, may want to be very careful before embarking on a tax cut agenda.

The Hamm government entered the last election promoting a 10 per cent income tax cut. In spite of the tax cuts and the $155 "election bribes" to taxpayers, the Hamm government was reduced to a minority. Within a year of implementing a 10 per cent income tax cut, the Hamm government reversed the cut because it was unaffordable.

And herein lies the fundamental problem that business lobby groups and all Nova Scotians need to consider: tax cuts come at a price that the province can ill afford.

In spite of the improved economic conditions, the province’s finance minister still faces two formidable challenges. For eight of the past 10 years, governments in Nova Scotia have consistently invested the least (per capita) of all provinces in programs and infrastructure to support citizens, communities and the economy. In spite of this, the province still has the second highest provincial debt in the country.

We have been putting off investments in, for example, post-secondary education, supports to low-income households, more sustainable energy production and consumption, and transportation infrastructure.

The biggest challenge for the MacDonald government is how to provide needed investments in programs and infrastructure, while managing its debt. Tax cuts decrease the government’s revenue and its ability to provide the services that support households, communities and businesses – services that make the province a desirable place to live, work and invest.

The Nova Scotia Chambers of Commerce recognizes the need for increased spending, stating that the province needs to invest significantly in road construction. At the same time, it is promoting tax cuts, which undermine the government’s ability to invest in roads.

There may be an argument for reforming taxation through a cut in a specific tax, but for the foreseeable future, any such cuts need to be balanced by a corresponding revenue increase in another area, so that the overall impact on government revenue capacity is neutral.

Given the province’s tight finances, business lobby groups need to state where the funds would come from to support the tax cuts they are proposing. Should services be cut and, if so, which? Are they advocating that we not increase investments in child care or income assistance for low-income households? Are they suggesting that programs that support the development of highways and other infrastructure be curtailed? Should less funding be allocated to support economic development programs such as NS Business Inc? Are they suggesting that the corporate tax cuts be cancelled or that user fees increase? Or, are they suggesting that the province run a deficit?

John Jacobs is director of the Nova Scotia office of the Canadian Centre for Policy Alternatives (www.policyalternatives.ca), an independent public policy research institute. A version of this article was published in the Chronicle Herald.