January 2001

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Throwing Down the Gauntlet: Alberta’s Business Tax Reforms and their Implications for the Western Provinces

by Jock Finlayson

Alberta's recent announcement that it will implement the main business tax reforms recommended by that province's Business Tax Review Committee¹ has put British Columbia on the spot. Unless it signals that it intends to follow Alberta by moving to lighten the tax burden on the business sector, BC can expect to see a growing number of companies, entrepreneurs, and high-paying corporate jobs migrate to the increasingly attractive business climate being created in Alberta. The other Western provinces face the same prospect.

According to a statement released by Treasurer Steve West on September 13, 2000, Alberta is cutting business taxes in five specific areas:

• its general corporate income tax rate will drop from 15.5 percent in 2000 to 8 percent by 2004;
• the corporate tax rate on manufacturing and processing income will be reduced from 14.5 to 8 percent over the same period;
• Alberta's small business income tax rate is slated to fall to 3 percent by 2004 from 6 percent at present; in addition, the top income threshold for the small business rate will climb from $200,000 to $400,000;
• provincial education property taxes are being lowered by $135 million next year and then frozen at this level; and,
• Alberta's capital tax on financial institutions will be eliminated in 2001.²

In dollar terms, these initiatives are significant. They are estimated to reduce aggregate business taxes in Alberta by $248 million in 2001, with the annual tax saving for the business sector rising to almost $1 billion by 2004 (see table 1).

Three factors appear to have prompted Alberta to move aggressively on business taxes at this time. The first is a wider global trend to reduce taxes on enterprises in order to spur investment and attract increasingly mobile capital. The trend is especially apparent in Europe, although it is by no means limited to that continent. The past two years have seen sizable reductions in corporate tax rates in Britain, Germany, Switzerland, Sweden, Ireland, Australia and Japan. In Canada, the 2000 federal budget pledged to cut income taxes for non-manufacturing businesses by one-quarter over 5 years—a promise that was re-confirmed in the Liberal government's October 18 pre-election "mini-budget."

Second, policy-makers in Alberta were also mindful of the 2000 Ontario budget, which unveiled a plan to reduce that province's corporate income tax rate by half, from 16 to 8 percent, by 2004. This was designed to give Ontario the lowest business income taxes in Canada and to put the province in a stronger position to compete with nearby American states for investment. As a result of its new business tax plan, Alberta will now match Ontario in the statutory corporate tax rate for both manufacturing and non-manufacturing companies.

A third factor contributing to Alberta's decision to lighten the tax burden on business was its extraordinarily favourable fiscal position. The province has run budget surpluses every year since 1994-95 and is rapidly paying down its net debt; this year, buoyed by surging oil and gas revenues, it is expected to post a surplus of at least $5 billion. This string of budget surpluses and the related drop in its stock of outstanding public debt have given Alberta a great deal of fiscal manoeuvring room.

Other provinces under pressure

Other provinces cannot afford to stand idly by while a key competitor aggressively reduces taxes on the business sector. Table 2 shows how Alberta compares with BC, Saskatchewan and Manitoba in main areas of business taxation today, and also where it will stand in 2004 assuming governments in the other provinces do nothing to address the business tax gap with Alberta in the interim. In that case, by 2004:

• the general corporate tax rate in Alberta will be less than half of the rates levied in the other three Western provinces;
• its corporate tax rate on manufacturing and processing income will also be less than half of the comparable BC and Manitoba rates, and considerably lower than the (variable) rates charged in Saskatchewan;
• Alberta's small business tax rate will be the lowest in the country; and,
• Alberta will continue to enjoy other important business tax advantages over BC, Saskatchewan, and Manitoba, notably in the sales tax on business inputs (Alberta does not have a sales tax), the capital tax (Alberta doesn't impose one on non-financial enterprises, and intends to remove its capital tax on financial institutions next year), and fuel taxes.

Table 2 indicates that taxes on business in the other provinces were noticeably higher even before the unveiling of Alberta's tax cut plan. With Alberta's proposed reforms, the disparities in overall business tax burdens will widen dramatically—unless the other provinces respond.

Apart from having more competitive taxes for businesses, Alberta also taxes individuals less heavily than the other Western provinces. To begin with, it has no provincial sales tax, in contrast to both BC and Manitoba, where a 7 percent provincial sales tax is levied on most goods and many services purchased by consumers, and Saskatchewan, where a general sales tax of 6 percent applies. Personal income taxes are also lower in Alberta. For the year 2000, its highest combined federal-provincial marginal tax rate on individuals is 43.7 percent, compared to 51.3 percent in BC, 49.7 percent in Saskatchewan and 48.1 percent in Manitoba.³ In 2001, all of the Western provinces will de-couple from the federal personal tax system and institute their own provincial personal tax rates and brackets. At that time, Alberta will adopt a 10.5 percent "flat tax" on personal income in excess of $12,000. For its part, BC will stick with a steeply progressive tax regime, under which the highest provincial marginal rate will be set at 19.7 percent—almost double the top provincial rate in Alberta. This means that highly skilled and well-paid workers and entrepreneurs in BC will face marginal tax rates almost ten percentage points higher than their counterparts in Alberta. Personal income taxes in Saskatchewan and Manitoba will also be appreciably higher than in Alberta in 2001.

So far, the BC government has failed to come to grips with the issue of tax competitiveness, particularly in the case of the business sector. Since 1998, the only progress by the NDP government has been to trim the small business tax rate and raise the threshold for levying the provincial capital tax, and recently, to introduce a tax credit to offset a portion of the sales tax paid on certain business purchases of machinery and equipment. While these are positive measures, they have yielded only minor tax savings for BC businesses—perhaps $110 million a year, according to estimates provided in the 1999 and 2000 BC budgets,⁴ a small fraction of the tax relief proposed by Alberta over the next few years, and less than 2 percent of the more than $6.5 billion in provincial income, sales, capital, property, natural resource, and fuel taxes currently paid by BC enterprises.⁵ The Saskatchewan government has been bolder than BC, at least on personal taxes. In response to recommendations from an expert committee, Saskatchewan has announced that it will bring down personal income tax rates, including the rates facing higher-income earners. To date, however, neither Saskatchewan nor Manitoba has given any indication that they plan to overhaul their business tax regimes. In this regard, they find themselves in the same position as British Columbia.

Despite their politicians' evident reluctance to address the issue of business taxes, it is likely that governments in BC and the other Western provinces will judge it necessary to respond as Alberta moves to significantly lower taxes on corporations. The intensifying competitive pressures stemming from the reduction and restructuring of business taxes in Alberta leave them with little choice.

Notes

¹Alberta Treasury, "Province Announces Major Cuts for Business and Property Taxes," News Release, September 13, 2000; Alberta Business Tax Review Committee, Report and Recommendations, September 2000. Both documents are available on the Alberta Treasury's web site: www.treas.gov.ab.ca.

²Unlike BC and several other provinces, Alberta has never levied a general capital tax on non-financial enterprises.

³KPMG, Tax Facts 1999-2000.

⁴BC Budget 2000, p. 63; BC Budget 1999, p. 59.

⁵This estimate assumes that business pays 40 percent of the provincial sales tax and half of the fuel tax.

Jock Finlayson is Vice-President of Policy at the Business Council of British Columbia. He holds a Master’s degree in Management from Yale University and undergraduate and MA degrees from UBC.

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