Zombie business tax lurches ever on

Calgary city council voted last week to phase out the city's business tax and replace lost revenues with higher commercial property taxes. The decision to shrink two taxes into one has repercussions for Winnipeg.

Recall that as a candidate in 2004, Mayor Sam Katz promised to phase out Winnipeg's business tax. If he'd stuck to the specifics of that promise, the tax would be on track to disappear somewhere after 2020, and the rate would now be at 5.25 per cent. What actually happened: The tax rate has only dropped to 5.9 per cent. Winnipeg collects the same $57.6 million in business tax in 2012 as it did in 2007.

Since 2004, while we dawdled, several other major Canadian cities completed business tax phase-outs. Calgary was the second-last holdout. So unless council acts quickly, Winnipeg is now on track to be the last major city in Canada with a separate tax on business tenants.

We fell behind in part because there was no plan to back up Katz's promise. So city councillors, staff and consultants dutifully did their best to help him invent a solution on the fly.

After savings-financed tax reductions in the 2005 and 2007 budgets, the focus on business tax reached a crescendo with the 2007 report of the "economic opportunity commission."

The commission recommended that business taxes disappear within six years, paid for with a mix of savings, cost-recovery fees and new provincial transfers. It also recommended recovering some costs by merging the two taxes at the back end of the process.

Several key councillors didn't hide their opposition to the report. They argued -- quite reasonably -- that keeping commercial and residential property taxes low should take priority over business tax cuts.

So, since 2007, the mayor's promise has lived on as a zombie commitment, neither alive nor dead. Few councillors wanted to force the mayor to admit defeat, even if they opposed his promise. The ultimate compromise was a so-called "small business tax credit." City hall rebates the full business tax bill to more than 4,000 of Winnipeg's smallest businesses at an annual cost of $3.9 million.

Here's the catch: Thanks to this policy, a sizable pool of businesses now have a vested interest in keeping the obsolete business tax alive.

The tax-merger path taken by nearly every other Canadian city replaces a smaller tax on renters with a higher tax on landlords. Landlords can easily pass the shift back onto tenants with a "net-net lease," as they have in other cities, producing a neutral outcome.

But passing on the tax credit isn't so logistically easy. Thousands of small businesses will resist losing those credits. So council's compromise may prove to be policy poison pill -- a short-term win that could ultimately delay a long-term solution.

There are long-term benefits from a merger, especially in the absence of other options. The most obvious gain is on the so-called "sticker price" issue. Economic development staff will have a hard time explaining why we use two complex taxes to do what other major Canadian cities do with one.

Merging both taxes also ends an implicit subsidy for blight and speculation, since our current system taxes empty commercial space at a lower rate than occupied space.

Even if the taxes were combined in such a way as to be revenue neutral, charging one commercial tax instead of two could also produce a minor windfall. Through quirks of law and calculation, some federal and provincial properties don't pay business tax, but they would be liable for higher commercial taxes through the grants-in-lieu system. Calgary expects $3.2 million more in annual grants as a result of their tax shift.

Operating one property tax instead of two realty taxes also saves money for government and businesses alike, since it eliminates the need for a separate assessments and appeals system.

Calgary projects $1.2 million in savings from the policy shift for its own budget. Business improvement zones will have to collect fees from property owners instead of property tenants, but other cities routinely use this approach.

Calgary weighed these factors and decided it was time to fall into line with the rest of the country. Meanwhile, Winnipeg's council hasn't had a formal debate on business tax policy in recent memory. Since Calgary's vote leaves our business tax sticking out like a rusty nail, now might be a good time to change that.

Brian F. Kelcey served as a political adviser in the mayor's office. He blogs at stateofthecity.ca

Republished from the Winnipeg Free Press print edition April 16, 2012 A11