New Brunswick government should reduce business taxes to spur wage growth

Economists and policy analysts have long pointed to New Brunswick’s high business taxes as an obstacle to economic growth. Why? Because high business taxes discourage investment and drive down wages.

This problem has persisted for so long that many may believe it’s too difficult and expensive to solve. In fact, the opposite is true. With its majority in the legislature, the new Holt government could lower the province’s business income tax rate to match the lowest current level in Canada at little cost to the treasury. And the benefits of such a tax reduction would be broadly shared across the income distribution.

Let’s start by looking at the problem. New Brunswick currently maintains a provincial business income tax rate of 14 per cent. That’s tied with Nova Scotia and just slightly lower than Newfoundland and Labrador and Prince Edward Island.

Compared to the rest of Canada, New Brunswick’s business tax rate is high. The next highest provincial rate is at 12 per cent in Saskatchewan, British Columbia and Manitoba. Alberta has the lowest rate in the country at 8 per cent, which means that businesses in Alberta face a tax rate 6 percentage points lower than in New Brunswick.

Here’s why that’s a problem.

A high business tax rate makes New Brunswick a less attractive destination for investment compared to lower-tax jurisdictions. Not surprisingly, research suggests that provincial business taxes are among the most economically harmful taxes in the entire tax mix. In light of Canada’s dismal recent economic growth performance, there’s a compelling for tax reductions at both the provincial and federal level.

Clearly, reducing the business income tax in New Brunswick would help drive economic growth. But opponents argue that the province simply can’t afford to forgo that tax revenue. However, according to a recent analysis, even if we assume that reducing New Brunswick’s business tax rate to 8 per cent to match the lowest rate in Canada (Alberta’s) had no effect on economic growth, provincial revenue would shrink by just two per cent.

And of course, a lower business tax rate would spur economic growth, even if the size of the effect is in dispute. Another study published by the University of Calgary estimated that lowering the business tax rate to 8 per cent in New Brunswick would actually increase government revenue from current levels due to increased economic activity.

In other words, while it’s impossible to precisely predict the growth effect of a business tax reduction in New Brunswick, the evidence is crystal clear that it wouldn’t produce large revenue losses for the government in Fredericton.

Finally, it’s worth underscoring that a lower business income tax rate would benefit New Brunswickers across income levels including workers in the form of higher wages. While economists can debate exactly how the gains are split, there’s a near-consensus among experts that both workers and shareholders benefit from business tax reductions.

Oftentimes, policymaking involves hard choices and difficult tradeoffs. Sometimes, however, there are policy changes that help encourage widespread economic growth with negligible costs. Reducing the business income tax in New Brunswick to match the lowest in Canada (again, 8 per cent) would attract investment and encourage growth while costing little and delivering benefits across the income spectrum. This would be a great way for the new government to begin its tenure in New Brunswick.