On July 1, New Brunswick and Newfoundland and Labrador raised the tax two percentage points to 15 per cent, joining Nova Scotia, which increased its harmonized sales tax (HST) in 2010. Prince Edward Island joins the club in October, when it hikes its rate a point from 14 per cent. These four provinces will inch just ahead of Quebec’s combined sales tax of 14.975 per cent.
These developments illustrate a clear policy direction from Atlantic Canadian governments. Facing budget squeezes – on account of an aging population and rising health-care costs, large and costly bureaucracies, economic stagnation, and substantial debt interest payments – the provinces are trying to increase revenue any way they can. They see raising taxes as a better alternative than controlling costs and reducing the size of the public sector.
Take New Brunswick, which has already increased personal and business taxes, as well as numerous fees on government services. Its $347-million annual deficit was caused by yearly average spending increases of 3.8 per cent since 2005. That’s more than twice the growth in inflation and the province’s negligible population growth. Had the province limited its program spending each year to a two per cent increase, it would today be running a healthy surplus. Instead, New Brunswick has made life miserable for its taxpayers and watched many leave in search of opportunity elsewhere.
Clearly the provincial situations aren’t all equal. With its fall from economic grace on account of collapsing oil prices, Newfoundland and Labrador stands apart from the rest in its malaise. The province wildly overspent in good times – after accounting for inflation, spending grew by more than 45 per cent over the past decade – and became, per capita, one of the biggest-spending governments in Canada. Today, it is paying a heavy price for years of poor planning and reckless spending.
The struggles of the others are distinct only by degree. The Ivany Report of 2013 found that Nova Scotia – the Atlantic province with the best economic health, thanks to continued growth in Halifax – risks jeopardizing its economy unless a series of bad policies is reversed.
High taxes are among these policies. They form a disincentive to investment in the region. They suck money out of the economy as business and entrepreneurs go elsewhere. They leave citizens with less available income with which to save, invest or spend. They deepen people’s dependence on the state, with so much of their income going to taxes and a greater perceived need for social programs.
When other jurisdictions in Canada and elsewhere are able to succeed economically and provide necessary services with lower tax rates, we need to ask whether continuing to squeeze the juiceless lemon in Atlantic Canada is really addressing the problem.
A recent Atlantic Institute for Market Studies (AIMS) study contrasted the tax regimes of Atlantic Canada with New England, our nearest competitors. The findings were definite. With the exception of slightly lower small business taxes in Atlantic Canada, all other taxes – personal, business and consumption – are higher, sometimes substantially so.
All New England sales taxes are lower than Atlantic Canadian sales taxes. Consider Vermont: its consumption tax is at six per cent, compared with what will now be a 10 per cent provincial share in the 15 per cent HST across our region. The effect is a higher cost for Atlantic Canadians in almost everything they buy. And the consequences are especially serious because consumption tax increases, like the HST, are not being offset by reductions in income taxes. Instead, Atlantic taxpayers are hit again and again by the taxman.
Higher HST rates will bring some more money into government coffers. But how will it help the region’s anemic growth, which is causing more young people to leave for Western Canada?
The fixation of our provincial governments on raising taxes, instead of creating the conditions for economic growth, comes from short-term thinking, which will in the long run hurt the region.
Atlantic Canada needs to grasp that ever-rising taxes are not the way out of our financial problems. Indeed, high taxes are one of the causes of our economic inertia.
Jackson Doughart is a policy analyst.