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JDI Roundtable on Manufacturing Competitiveness in New Brunswick

New Brunswick would be crazy to tax machinery and equipment

Herb Emery

Two years after moving to New Brunswick, I think I have finally come to understand how politicians in the province approach tax policy.

If you are of a certain age, you’ll remember watching a cartoon where Wile E. Coyote devised comically convoluted schemes to catch and eat the speedy and mobile Road Runner. If you think about business, capital being the Road Runner and revenue-hungry governments as the Coyote, every time a clever plan is devised to tax business and capital in New Brunswick, something blows up or the coyote falls off a cliff.

The latest iteration of this tragi-comedy is the return of a proposal to amend provincial legislation to allow the City of Saint John to tax machinery and equipment of its heavy industry. The purpose of this property tax is not to restore balance to the city’s budget, but to shift the tax burden away from residential homeowners for reasons of “tax fairness.” 

What could go wrong?

A disturbing part of this proposed tax policy change is that unlike when the Green Party leader introduced a similar bill in 2017, this one may even have sufficient support from a bloc of three non-governing parties to actually pass into law.

In other words, the opposition parties may be able to inflict a mortal tax-policy wound on New Brunswick because of the strange arithmetic of the legislature under this minority government.

The current bill’s sponsor, Saint John MLA Gerry Lowe, has pointed out that no one else has tried this. He is correct in the sense that most governments are trying to encourage investment, not deter it. 

In the U.S., the Trump tax reforms are reducing tax burdens on capital. The federal Liberal government has also introduced changes in depreciation allowances for capital and equipment to spur investment. So why would New Brunswick think that raising taxes on machinery and equipment is a good thing to do?

Higher taxes on capital are avoided in recognition that capital, inclduign the machinery and equipment in heavy industry, is mobile – like the Road Runner. Don’t just think about the physical buildings and equipment in place; think about the buildings, machinery and equipment that may not be installed in Saint John in future because of the tax.

If depreciating machinery and equipment is not replaced, then at some point this capital reaches the end of its usable life and the business operating at the site shuts down and moves its operations elsewhere. Just ask Oshawa about how that works. 

The other mistake Saint John may be making is that even with the tax exemption for machinery and equipment, business tax burdens are high in the province. A 2017 CD Howe study estimated the overall tax burden on business in Canadian cities, accounting for business property taxes. 

These taxes in the region represent half of the total tax burden on business. With the high levels of business property tax in New Brunswick, Saint John had, far and away, the highest tax burdens for business in the Atlantic region and in Canada.

A 2018 version of the CD Howe study shows that Moncton also has a high tax burden for business, but more in line with other cities in the region. And these numbers do not account for the effect of payroll on taxes like WorkSafeNB premiums on overall business tax burdens.

It isn’t clear if the CD Howe study accounts for the provincial tax exemption on machinery and equipment, but given the high combined provincial and municipal business property tax, the exemption would seem to be useful for keeping trade-exposed heavy industries competitive.

The CD Howe study alerts us to some critical issues with the Gerry Lowe proposal. First, account for provincial and municipal business property taxes in overall business tax burdens shows New Brunswick is among the least-competitive business environments in Canada. This contrasts with the beliefs of those who assume that the existence of “tax breaks” for industry mean industry is capable of paying more.

Second, there is only one taxpayer, but several levels of government have revenue needs. So if you want to raise municipal taxes on business, then to not lose investment in New Brunswick, the province will likely need to reduce its tax effort on business.

Major changes to tax policy need to be developed in the context of the full suite of taxes levied by municipal, provincial and federal governments and not as one-off changes intended to address the interests of one municipality.

The bottom line is that New Brunswick has been experiencing a loss of its capital stock – machinery and equipment in particular – since 2008. It is ill-advised to contemplate making a change to the tax treatment of business property taxes like the current proposal without considering the economic risks that come with eroding business competitiveness. 

If this tax increase kills of business investment in Saint John, then will this policy have solved Saint John’s budget challenges or even provided tax relief to residential homeowners? 

If we are to change a part of the province’s tax code, the bigger question is how does this help the province overall.

Meep, meep.

Herb Emery is a Brunswick News columnist and the Vaughan Chair in Regional Economics at the University of New Brunswick.

This article first appeared in Brunswick News publications – Dec. 19, 2018

The JDI Roundtable on Manufacturing Competitiveness in New Brunswick is an independent research program made possible through the generosity of J.D. Irving, Ltd. The funding supports arms-length research conducted at UNB.