Throughout the B.C. election campaign, NDP Leader John Horgan has been dogged by questions about how he will pay for some of his spending promises and whether the tax increases detailed in the party’s platform will be the only ones businesses could expect under an NDP government.
For business, the concern isn’t so much the NDP’s planned one per cent hike to corporate taxes, from 11% to 12% – which would still be in line with other western Canadian provinces – but rather the potential for other tax hikes to come in an era when American President Donald Trump is vowing to implement Reaganesque tax reforms south of the border.
Trump has good reasons for wanting tax reform. Acccording to the Tax Foundation, the U.S. has the second highest corporate tax rates out of 43 countries surveyed.
Federal corporate tax rates of 35%, combined with state taxes, bring the average marginal corporate tax rate in the U.S. to about 40%. Canada’s combined federal-provincial tax rate, which was 44% in 2000, has been reduced to 26%, putting Canada in a more competitive position. Trump wants to lower the federal rate to 15%.
“The corporate tax cuts that happened over the last decade have given Canada a tax advantage over the United States,” said Craig Alexander, chief economist for the Conference Board of Canada.
“But if you went from 35% to 15%, Canada would go from having a modest advantage to having a very large disadvantage, and that would really be a challenge for Canada. We probably could not ignore a large drop in U.S. corporate tax rates.”
Trump has also talked about implementing a border adjustment tax, which would be a big a problem for Canadian exporters.
“It would make Canadian exports to the United States a lot less competitive and it would be paying for tax cuts in America that would put Canada at a disadvantage,” Alexander said. “That’s the worst possible scenario.”
Should Trump succeed in getting his all of his tax reforms through Congress – and there are serious doubts he can – Vancouver’s tech sector, which is fairly mobile, might find the lure of low taxes irresistible, according to Steven Flynn, a partner at W.L. Dueck and Co. LLP, a cross-border taxation and accounting consulting firm.
“Companies may have a couple of hundred people up in Canada working, and they may say, ‘It’s a little too expensive here, from a tax perspective – we really need you working down in California or Washington or somewhere else,’” Flynn said. “I think the high-tech sector’s a bit at risk.”
American firms like Microsoft (Nasdaq) and McKesson Corporation (NYSE:MCK) have been lured to Vancouver by its tech talent and competitive tax rates. Combined, those two companies alone employ more than 1,200 people.
As long as the profits from those foreign operations stay in Canada, they pay lower taxes, which explains why countries like Ireland and Canada have benefitted from American companies sheltering their profits in other countries.
“You get a Tim Hortons buying a Burger King, which you’d say wouldn’t make sense, but they’re trying to suck profits out of the U.S. and have them taxed in lower jurisdictions,” Flynn said.
Microsoft alone has about $150 billion in profits sheltered outside of the U.S., Flynn said. Trump hopes to bring some of those profits and operations back to the U.S. with more competitive business tax rates.
Should Trump succeed in getting a 15% corporate tax rate passed, it would mean that B.C. would have a combined tax rate of 26% to 27% (depending on who wins the B.C. election), compared with combined American rates of 25% in places like Washington State and California.
That differential might not be enough to convince an American company to close up shop in B.C. and relocate its operations back to the U.S., Flynn said, but it might prevent future investment here.
“Maybe the jobs stay here (with) the company I started, but it’s the next 100 or 1,000 jobs that I might create in the next 20 years that are now in the U.S.,” Flynn said.
The good news is that Trump’s proposed tax cuts are so dramatic that U.S. lawmakers will likely balk at such a huge loss of revenue and ballooning deficits.
“I think we are going to see tax reductions in America, but we don’t know what size they’re going to be because, put quite simply, Trump’s proposals are completely unaffordable,” Alexander said.
As for Trump’s border tax, Alexander returned from Washington recently, where he was relieved to find little appetite there for such a tax.
“I was in Washington a week or so ago, and in Washington there is a broad consensus that a border adjustment tax isn’t going to happen,” he said. “It’s too complex.”
But until there is a clearer picture of where the U.S. may end up on tax rates, Alexander urges Canadian governments at all levels to steer a steady course, and avoid both tax increases or decreases.
“If you have a government that says they want to change Canadian tax rates, I would encourage them to wait and see what happens in America before actually implementing those promises.”
