All governments in Canada will face challenging fiscal circumstances over the next few years because the COVID-19 pandemic has resulted in appropriate but very significant deficits. Governments will need additional revenues to fund a stronger, more inclusive recovery, as well as deal with urgent crises like inequality and climate change.
However, recent provincial budgets already include significant real spending cuts and “restraint” – the opposite of what is required. Inadequate public spending will be economically and socially damaging and contrary to what a majority of Canadians want — which are substantial improvements to public services and programs like affordable housing, eldercare and education.
Fortunately, federal and provincial/territorial governments have a much better alternative to austerity – progressive tax reforms which have even been suggested by the International Monetary Fund. There is a great opportunity for well-co-ordinated tax reform in Canada, but instead, different levels of governments often act unilaterally and sometimes at odds with each other. Inspiration could be taken from other countries that have come together to reform the global corporate tax system.
While much of the conversation about progressive tax reform has been focused on federal measures, provincial (and territorial) governments also have an important role to play. They have their own robust taxing powers and can be strong advocates and partners for substantial tax reform at the federal level. Provinces can work together and with the federal government to eliminate tax avoidance and permanently close loopholes.
In the past few years, there has been relatively little conversation at the provincial level about reforming the tax system for greater fairness and progressivity — with the main exceptions of B.C. and Quebec. Since 2018, B.C. has raised its top marginal income tax rate to match Ontario’s, increased the corporate tax rate by one point, and replaced regressive health-care premiums with an employer-paid tax that exempts small businesses. B.C. has also taken innovative steps, albeit limited ones, in taxing skyrocketing property values, adding a new bracket to the provincial portion of property taxes on residential real estate worth more than $3 million. It also implemented a speculation and vacancy tax on empty homes in expensive areas of the provinces. Quebec, for its part, led other provinces and the federal government in introducing sales taxes on digital products sold by foreign companies to level the playing field with domestic companies.
At a minimum, provinces should have an interest in supporting and facilitating progressive tax reform at the federal level. Considering how much their budgets depend on federal transfers for key public services like health care and housing, they have good reason to do so.
Provinces also have much to gain when the federal government broadens their common tax bases, whether through preventing international tax dodging, or by eliminating tax loopholes that cost both federal and provincial governments tens of billions of dollars annually.
Top marginal income tax rates in Canada are still far from revenue-maximizing levels, which are in the 60-to-70 per cent range. If the federal government won’t make use of this tax space, provinces should lead the way by raising their marginal rates on the wealthiest. The same goes for corporate tax rates. Alberta’s recent cuts to its corporate tax rates have demonstrated how ineffective they’ve been in stimulating investment and jobs, how costly they are in foregone revenues – and how provincial co-operation in raising rates would work much better. As U.S. Treasury Secretary Janet Yellen said, it’s time to end the race to the bottom. Even the Conservative government in the U.K. is planning to increase its corporate tax rate to 25 from 20 per cent. Ideally, the federal government would lead but if not, then large provinces should help raise the bar by increasing rates.
Real estate is also a natural and equitable tax base for the provinces, since property wealth is a massive source of inequality and can’t be hidden or moved across borders. B.C.’s recent policy moves are a good starting point, but they only scratch the surface. The new progressive tax brackets and vacancy tax so far raise a couple of hundred million dollars per year, but this is a tiny fraction of the more than $1 trillion worth of increases in property wealth in B.C. since the mid-2000s. Additional brackets and more robust tax rates are needed, particularly on high-end real estate.
Just as more than 130 nations are negotiating new rules through the Organization for Economic Co-operation and Development (OECD) to establish a global minimum corporate tax rate and enact other measures to prevent tax dodging, Canadian provinces should co-operate much more to establish minimum tax rates on corporations and wealthy individuals, close tax loopholes and introduce progressive tax reforms.
It shouldn’t come as a surprise that after seeing our core public systems and supports falter during the pandemic – when they mattered most – Canadians are calling on the country to take a new direction. Every level of government has a role to play in charting this new course, which must include a reversal of the last 40 years of tax policy that gave massive breaks to those with wealth.
As federal and provincial deficit spending continues, the long-term choices seem clear – either raise taxes on wealthy individuals and corporations to help fund long-term, badly needed increases in public investment, or fail to meet the defining social, environmental and economic challenges of our time.
It’s clear where Canadians stand. A majority want long-term and permanent improvements to Canada’s health care, child care and affordable housing among other things – changes that require permanent increases in spending – and they believe that taxing the rich is the right way to pay for it.