A kind of moral hazard

KPMG is out with their tax competitiveness model (building on their operating cost model from earlier this year).   You will find that Moncton and Fredericton are the lowest cost jurisdictions in the word (among the jurisdictions compared) for several industries and in the lowest 10 for all others.

Here is KMPG’s methodology:

So basically all business taxes – including those paid on labor (CPP, EI, etc.) are included in the mix.

It is important to point out – I have before – that Canada as a whole has a tax system that is biased towards personal tax compared to business tax.  Far more taxes at all levels of government come from people than from business (use HST as an example – levied on people but not on business).  This has been a calculated public policy decision over time that Canada needs a low corporate tax regime to compete against the big bad US of A. 

You will note that most US jurisdictions have double the tax burden on corporations as New Brunswick.  For manufacturing, the Moncton index rating is 50  and Boise, ID is 92.  That means that the exact same plant with the exact same characteristics will face almost double the tax burden in Boise than in Moncton.

This is exactly why I think we need to counter the U.S. jursidiction and their use of tax incentives for economic development.  A company might get $100 million worth of tax breaks in Boise that they wouldn’t have to pay in New Brunswick anyway.

I have asked governments and economic development agencies to take a simple manufacturing model and do this exact comparison to tackle head on the net benefit from tax incentive use in the U.S. compared to Canada but I have never seen it done.  The KPMG is an interesting model and should be used but a far more impressive approach would be to take the Toyota plant in Kentucky, determine all the tax breaks they got (Hundreds of millions) and see what they would have paid in New Brunswick.  My suspicion is that they would have only paid a fraction of those taxes in New Brunswick but we will never know.

But, I digress.  My blog title was “a kind of moral hazard”.  I am not sure that New Brunswick should set its corporate tax structure that much lower than other Canadian jurisdictions.  Depending on the sector, there is a significant spread between Nova Scotia, Saskatchewan and New Brunswick (NB lower).  While that looks like a competitive advantage, I am not sure.  Quite frankly, I haven’t thought too much about it.  How low is low enough?  My stated position and I am not moving off it yet is that New Brunswick’s corporate tax structure on average should be in line with the Canadian average and that we should use targeted tax incentives to grow specific clusters.

With one huge exception.  I am thrilled New Brunswick has the lowest tax environment for R&D.  That should be shouted to the highest heaven.  If companies are going to take risk, explore, create, innovate – they should have a positive tax environment in which to do it.  And according to KPMG, we are such an environment.

Sell.  Sell. Sell.

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