Tax cuts won’t be sustainable – Brandon Sun

Opinion

Another tax measure announced in the Manitoba election by the Progressive Conservative party brings the tally of tax cuts proposed by the party above $1.2 billion (annual cost by 2027), raising serious questions about how a PC provincial government would cover revenue losses without large cuts to services or infrastructure investment.

The PCs announced they would eliminate the Health and Social Levy (payroll) tax cut over eight years, removing at least $440 million of revenue from the provincial treasury once fully implemented in 2031. The Health and Education Levy goes to general revenue to help cover the cost of core services that create a healthy and educated workforce, which businesses require to operate.

Two decades of tax cuts have significantly reduced the share of taxation Manitoba corporations contribute to provincial revenues. Manitoba is the only province not to have a business tax for businesses with profits below $500,000. As of 2021, Manitoba’s corporate tax revenue as a share of GDP was the lowest of any Canadian province.

Focusing economic strategy on income and corporate tax cuts in this election marks a revival of “trickle-down economics.” Decades of evidence from Canada and abroad tells us that corporate and income tax cuts alone are highly unlikely to propel large capital investment, and given the effect these cuts will have on provincial finances, could even reduce long-term investment.

Since 2001, federal governments have cut corporate tax rates from 28 per cent to 15 per cent, meaning that today Canadian corporations on average pay about half the tax rate they did in the late 1980s. In the face of government intentions, capital investment by Canadian corporations has continued to decline since 2001. Data across OECD countries reveals no relationship between corporate tax rates and business investment.

A review of Alberta’s 2019 attempt to spur economic growth through large business tax cuts found that the strategy delivered no benefits in terms of job creation, wage growth or business investment relative to other Canadian provinces. The strategy did, however, hand Alberta corporations the highest profit rates in Canada and increased economic inequality in the province.

The legacy of trickle-down economics across the western world has been a massive growth in wealth and income inequality. Evidence now clearly shows that high levels of income inequality reduce overall economic growth, while giving corporations and wealthy individuals the balance of power in our political system. Canadian corporate profits are already at historic highs, casting further doubt on the claim that cutting corporate taxes will benefit most Manitobans.

Businesses make investment decisions based on numerous factors, including availability of trained workers, expectations of demand, availability of technology and a stable regulatory environment. Many of these factors rest upon basic public services such as quality health care, good schools, access to child care, affordable housing and quality infrastructure. A move to balance the budget quickly amid aggressive tax cuts proposed by the PC party and the NDP (via their support of Budget 2023-24’s tax cuts and proposals to eliminate the provincial gas tax temporarily) will decrease the revenue needed to fund important public services and prepare for economic shocks like another pandemic and the climate emergency.

Tax cuts can even be counterproductive if they undermine investment in training, infrastructure and innovation. The Parliamentary Budget Office noted in 2022 that Manitoba’s provincial finances are already unsustainable due to tax cuts. Changes to federal transfers forecast to begin in 2027 could create large provincial deficits in Manitoba.

Provincial own-source revenues (total revenues minus federal transfers) have declined significantly and are projected to continue falling, from 25.3 per cent in 2007-08 to a projected new low of 15.9 per cent in 2023-24. Federal funding meant to rebuild social services is instead partially replacing provincial revenues.

There is no question that Manitoba requires own-source revenue to restore public services, reduce poverty and address climate change. Governments should be focused on bottom-up economic growth via strengthening government transfers to low- and moderate-income people and boosting the minimum wage to stimulate spending in the local economy. This would reverse growing income inequality in Manitoba and save the public purse money on the downstream costs of poverty in the health and criminal justice systems.

Both the PCs and the NDP are pursuing private-sector investment to grow the provincial tax base. But with $1.2 billion in tax cuts announced on top of $1.6 billion cut since 2016, the PCs seem to be betting the house on tax cuts. Given how thin the evidence is that this strategy will work, the fact that corporate profits are another round of large corporate tax cuts should raise red flags for voters.

» Niall Harney holds the Errol Black Chair in Labour Issues and Molly McCracken is the Manitoba director at the Canadian Centre for Policy Alternatives – Manitoba office.