Kenney government should proceed with corporate tax reductions

Alberta is in the throes of a severe recession. Premier Jason Kenney has warned of “profound adversity” worse than anything since the 1930s. Thousands of a families are suffering from job loss and falling incomes, and are staring into an uncertain future.

With so many people facing terrible hardship, some may consider it insensitive to consider the need for corporate tax reduction in the province. The reality, however, is that the strength of the economic recovery, when it does come, will hinge in part on the extent the provincial government maintains a pro-growth tax and regulatory environment.

As one part of that effort, the Kenney government should proceed with the scheduled corporate income tax reductions, which will reduce the general corporate income tax (CIT) rate from 12 per cent to 8 per cent over a four-year period.

Let’s start by looking at the reasons why CIT reductions are important.

Simply put, the CIT is one of the most economically-harmful components of our tax mix. In an aptly titled study The Costliest Tax of All, published by the University of Calgary’s school of public policy, economists Ergete Ferede and Bev Dahlby showed the CIT causes more economic damage (per dollar raised) than other forms of taxation. In other words, the CIT is one of the most harmful ways governments raise revenue. As such, the evidence suggests lowering the CIT as planned can help boost Alberta’s recovery at the margin.

As such, the Kenney government should resist calls to put the planned CIT relief on hold temporarily because of Alberta’s large budget deficit. This is exactly what happened in Ontario, when its Liberal government “temporarily” delayed a plan to reduce the CIT from 11.5 to 10 per cent. Unfortunately for Ontario’s economy (and Ontarians), that “temporary” delay is almost a decade old now, and there’s no sign that the provincial government plans to follow through on the promised-but-now-almost-forgotten CIT reduction plan.

In short, Ontario’s experience suggests that supposedly temporary delays of important tax reforms can easily become permanent. Of course, fighting the deficit should be an important goal for the Kenney government, but maintaining higher CIT rates is an economically-harmful strategy for trying to achieve it.

Eventually recovery will come to Alberta. When it does, policy choices will influence the strength of that recovery. One way the Kenney government can give Albertans the best chance to prosper in the years ahead, is to create a pro-growth tax environment. Proceeding with planned CIT reductions is one example of how this can be done.

Again, given how badly Alberta families are struggling, some may consider it insensitive or out of touch to focus on corporate tax reductions. In reality, however, one of the best ways the government can help Albertans recover lost jobs and income is to reduce the taxes that hurt the economy the most.

There’s no magic bullet to eliminate all of Alberta’s economic problems. However, this type of pro-growth tax reduction can give the province a better chance at a robust recovery and help generate the job and income gains Albertans desperately need.