Hiding in Plain Sight: The Harmful Impact of Provincial Business Property Taxes
When governments analyze tax policies aimed at attracting investment, they typically rely on a variable called the marginal effective tax rate (METR) on capital. The METR is a measure of the effective tax burden on new business investment. Recent Ontario budgets have presented estimates of the METR, while emphasizing the economic benefit of reducing taxes included in these estimates. This Commentary makes the case that METR estimates have so far underestimated the actual tax burdens that investors face, because they exclude a major tax on businesses: provincial business property taxes. Excluding these taxes means that provinces do not adequately recognize the economic benefit of reducing them. Provincial governments in Ontario, Alberta and British Columbia, the three provinces we consider, now hold the taxing power once held by school boards. This power shift has transformed the business education tax (BET). When school boards controlled the BET, it combined – at least potentially – two separate taxes: a benefit tax financing local schools and a tax on capital investment. Provincial takeovers have since eliminated any benefit tax component. From the standpoint of investors, business education taxes – despite their obsolete name – are now simply provincial business property taxes. We find that including the BET adds substantially to METR estimates in Ontario. The impact of the BET on British Columbia’s METR appears to be somewhat less than the impact in Ontario, while the impact on Alberta’s METR appears substantially less. The BET’s substantial impact on Ontario’s METR lends strong support to the case for parity between business and residential education tax rates. We estimate that if the BET rate were reduced to parity with the residential education tax (RET) rate, its METR impact would be much smaller. Even an announcement that BET/RET rate parity is to be attained in 15 years would immediately reduce the METR impact of BET due to the effect on investor expectations. As a start, governments should include the BET in published METR estimates, such as the estimates published routinely in Ontario budgets. Leaving out the BET means missing a large part of the tax burden investors pay. It thus leads governments to underestimate the negative impacts on investment stemming from their tax systems, and it causes governments to defer – perhaps indefinitely – tax reforms needed to mitigate those negative impacts.
Volume (Year): (2012)
Issue (Month): 368 (December)
|Contact details of provider:|| Postal: |
Phone: (416) 865-1904
Fax: (416) 865-1866
Web page: http://www.cdhowe.org
More information through EDIRC
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Philippe Bergevin & William B.P. Robson, 2012. "More RRBs, Please! Why Ottawa Should Issue More Inflation-Indexed Bonds," C.D. Howe Institute Commentary, C.D. Howe Institute, issue 363, September.
- Benjamin Dachis, 2012. "Stuck in Place: The Effect of Land Transfer Taxes on Housing Transactions," C.D. Howe Institute Commentary, C.D. Howe Institute, issue 364, October.
- Robin Boadway & Neil Bruce & Jack Mintz, 1984. "Taxation, Inflation, and the Effective Marginal Tax Rate on Capital in Canada," Canadian Journal of Economics, Canadian Economics Association, vol. 17(1), pages 62-79, February.
- David Longworth, 2012. "Combatting the Dangers Lurking in the Shadows: The Macroprudential Regulation of Shadow Banking," C.D. Howe Institute Commentary, C.D. Howe Institute, issue 361, September.
- William B.P. Robson & Alexandre Laurin, 2012. "Federal Employee Pension Reforms: First Steps - on a Much Longer Journey," e-briefs 140, C.D. Howe Institute.
- Jonathan Witmer, 2010. "Trends in Issuance: Underlying Factors and Implications," Bank of Canada Review, Bank of Canada, vol. 2010(Autumn), pages 19-30.
- Benjamin Dachis & William B.P. Robson, 2012. "From Living Well to Working Well: Raising Canada's Performance in Non-residential Investment," e-briefs 137, C.D. Howe Institute.
When requesting a correction, please mention this item's handle: RePEc:cdh:commen:368. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Kristine Gray)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.