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JDI Roundtable on Manufacturing Competitiveness in New Brunswick

No mystery why N.B.’s economy struggles

Herb Emery

The Standing Committee on Law Amendments will meet this week for public consultation on Motion 31, to provide recommendations to the province about “whether to reduce or eliminate any property assessment or property taxation exemptions or benefits that apply to heavy industry.” Of particular note, they will look at whether to include the value of the equipment and machinery in property tax assessments.

Even giving this concept airtime is damaging the business climate, let alone holding public consultations on it. The ultimate recommendations of the committee may stem the damage already done, or sink the provincial economy once and for all. But hey, no pressure.

Motion 31 rests on claims that 1) heavy industry benefits from tax exemptions in New Brunswick; 2) public institutions such as hospitals have much higher assessments than many significant industrial properties; and 3) that the City of Saint John commissioned reports entitled “Municipal Property Tax Issues in The City of Saint John” and “City of Saint John Fair Taxation Report” that raised concerns with these exemptions.

Missing in this debate is the recognition that New Brunswick’s current tax treatment of heavy industry serves a purpose. New Brunswick heavy industry is capital-intensive, tends to have higher labour productivity and pays higher wages – all good things. But most importantly, the pulp and paper mills, smelters, the Irving Oil Refinery and whatever else the government chooses to define as ‘heavy industry’ represent a significant share of our GDP and are New Brunswick’s most “trade-exposed.”

These facilities aren’t competing for market share like public institutions like hospitals; rather, they compete with similar operations located outside New Brunswick. To help you understand the risk to our economy of targeting “heavy industry”, given the high trade exposure of our producers, sing the Frank Sinatra lyric, “if you can make it here, you can make it anywhere”.

Proponents of Motion 31 have compared the Saint John refinery to an Alberta refinery in terms of property taxes collected, to suggest local taxpayers are getting hosed. But the devil is always in the details. And if you want to make evidence-based decisions, make sure you understand the evidence.

The Alberta refinery is not trade-exposed. It is owned by an integrated oil sands producer that sells in the western Canadian regional market only. Its overall tax position must be considered in the context of the impact on other taxes paid, like royalties on oil sands production. One offsets the other, making the impact of local property taxes much less important.

Motion 31 originated from a selective interpretation of the Kitchen and Slack Report, which was commissioned by Saint John to look at the fairness of industrial taxes versus residential taxes.

As the experts themselves highlighted, “there is no clear answer to the question about the appropriate relationship between non-residential and residential property taxes.” However, they wrote, “three principles of taxation – equity based on benefits received from local services, accountability, and efficiency – suggest that non-residential properties should be taxed less than residential properties” (page 39).

Kitchen and Slack also wrote: “The role of property taxes is to pay for services and not redistribute income” (page 8) and “there is no jurisdiction for a higher tax on business because business properties use fewer services than residential properties and they are more likely to move in response to a tax increase” (page 4).

According to Kitchen and Slack, if we ignore the provincial property tax paid by commercial and industrial properties, then the ratio of municipal commercial/industrial to residential property taxes is 1.5, which is lower than other comparator municipalities in Canada they considered (page 29).

But when we factor in those provincial taxes paid by business, New Brunswick and Saint John do not have a low ration. The CD Howe Institute has shown that business property taxes in New Brunswick render an otherwise-competitive corporate income tax rate into a high tax burden on capital, relative to other provinces.

So while Saint John might not be getting the revenue it wants or needs, this isn’t because businesses aren’t paying enough taxes. They’re just paying a sizable share of those taxes to the province instead of to the city. Motion 31 seeks to raise total tax paid by heavy industry, rather than looking at whether the share of tax between the province and local government are fair or appropriate.

Another argument for Motion 31 contends that exemptions on equipment and machinery distort the market to favour capital-intensive enterprises over less capital-intensive enterprises, like warehouses, contact centres and IT companies. But take a moment to digest that argument: One of the justifications for including machinery and equipment in the property tax base would be to discourage investment in machinery and equipment. Motion 31 sets New Brunswick apart from most other provinces and U.S. states. I can’t think of too many governments that purposefully design policy to discourage investment.

New Brunswick’s economy depends on heavy industry but the province has fallen behind on investment in manufacturing, particularly machinery and equipment, despite the exemption of machinery and equipment from the property tax base. Our plants are getting older and less efficient, compared to the competition. Motion 31 would place yet another government-erected barrier on productivity-improving investments in equipment and machinery, which are so necessary for the sector to survive and grow. 

Federal programs intended to spark new investment are undermined to the point of ineffectiveness by provincial policies and decisions that reduce business competitiveness in the region. All those federal dollars and accelerated depreciation allowances in the tax code aren’t making the business climate better, they’re just stopping it from getting worse.

Kitchen and Slack recognized this in their report when they recommended that any changes to the tax treatment of machinery and equipment be offset by a lowering of the tax rate applied to the broadened tax base. Motion 31 is about raising tax on capital and not what the experts recommended, which was a restructuring of how we tax capital.

While the rest of Canada – including Quebec – directs their efforts at creating a more attractive business environment and encouraging business sector investment, we’re holding public discussions about the merits of discouraging investments in machinery and equipment in the name of tax fairness.

It there is a silver lining to the meetings this week, then it is that it will no longer be a mystery as to why New Brunswick’s economy struggles to grow compared to other provinces.

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 – Sept. 4, 2019

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.