Tax reform here gets failing grade

MANITOBA is at the bottom of the pack when it comes to corporate tax reform, and a taxation expert says that makes for an uninviting investment climate.

A paper by University of Calgary economist Jack Mintz, former head of the C.D. Howe Institute, ranks Manitoba right at the bottom with the highest marginal effective tax rate on capital of 30 per cent.

"Manitoba is out of synch," Mintz said in an interview Tuesday. "At the end of the day, it is about creating jobs and there is a high burden on capital in Manitoba."

Mintz said if the province does not stay diligent in attempting to ease its tax regime, it could have "a significant problem on its hands."

Many critics will acknowledge the province has made headway in reducing taxes -- the small-business tax has been eliminated and the capital tax ended at the beginning of this year -- but Mintz said he believes the decision to not harmonize the GST and PST will have a damaging effect on the investment climate.

"By 2013, unless action is taken now, both provinces (Manitoba and Saskatchewan) will be even less competitive than P.E.I., currently the least competitive province in Canada," Mintz said. "The solutions are obvious -- harmonize the GST into an HST, reduce the general tax rate for all business and end targeted tax breaks -- those hurt productivity."

Manitoba's finance minister, Rosann Wowchuk, said serious consideration has been given to harmonization of taxes, but the cons outweighed the pros. "We estimated that it would save business about $500 million, but cost consumers about $400 million," she said. "The decision was made during a very tough job market and we felt it was too tough a hit for consumers."

Wowchuk was unapologetic about the province's tax regime, noting Manitoba is the only province to have completely eliminated the small-business income tax.

But local business analysts say there is plenty of room left for improvement.

Dan Overall, director of policy and communications for the Manitoba Chambers of Commerce, said while the province has made great strides that should be applauded, there is no tax relief planned after 2011.

"The problem is, the current government refuses to make an effort to develop a vision for tax relief for the province and we need it," Overall said.

In his paper, Mintz commends Ottawa for sticking to its guns in reducing the corporate tax rate to 15 per cent next year from 16.5.

He said taking the federal rate to 15 per cent will result in a $30.6-billion addition to the country's capital stock and generate 100,000 jobs. He suggests that will translate into $900 million in capital investment in Manitoba and about 3,100 jobs in this province.

However, Mintz and report co-author Duanjie Chen conceded it will take at least seven years for the full benefits to kick in. Despite the report's focus on tax of capital, Manitoba business leaders couldn't help but raise the payroll tax as being the biggest thorn in the side of business investment in the province.

Jim Carr, CEO of the Business Council of Manitoba, which represents many of the province's largest private-sector employers, refers to it as the most irritating tax for business.

"It is a tax on jobs and growth," he said. "We continue to press the government to announce its intention to phase out the payroll tax. That would send a positive sign to those wanting to expand their workforce here and lay a marker down."

martin.cash@freepress.mb.ca

Manitoba's corporate tax regime

12 per cent -- Manitoba's corporate tax rate in 2010

Seventh highest -- 2010 ranking among the provinces (tied with Saskatchewan and Ontario)

12 per cent -- Manitoba's expected corporate tax rate in 2013

Seventh highest-- 2013 ranking (tied with Saskatchewan)

30.4 per cent -- Manitoba's marginal effective tax rate on capital investment in 2010

The highest -- ranking among the 10 provinces

27 per cent -- Manitoba's projected marginal effective tax rate on capital investment for 2013

Ninth highest -- ranking among the provinces

-- Source: Federal-Provincial Business Tax Reforms: A Growth Agenda with Competitive Rates and a Neutral Treatment of

Business Activities, by Duanjie Chen and Jack Mintz*

Republished from the Winnipeg Free Press print edition January 26, 2011 B5