When did tax cuts go out of style?

The trio of provincial budgets brought down last week by Quebec, Ontario and Alberta herald a worrisome trend. All three governments are abandoning tax relief while embracing higher spending and increased government intervention as a means of stimulating economic growth. It’s as if collective amnesia has taken hold. As a result, the proven economic benefits of tax cuts have retreated under a fog of dirigisme.

Let’s start with Quebec. One of Liberal leader Jean Charest’s major election promises in 2003 was an annual $1-billion personal income tax cut over the next five years, long overdue in the province that has the highest marginal tax rates in the country. As Premier, Charest has failed to deliver on this pledge, preferring instead to dole out a few small targeted tax breaks such as an annual «worker’s deduction» for employed persons. He has now switched his focus to debt repayment. But a glance at the not-so-fine print of Charest’s debt-reduction plan reveals that Quebec’s debt will actually grow for 15 years before it starts decreasing.

Charest’s debt-reduction plan will do far less to stimulate the economy than tax cuts, particularly those aimed at the top end of the income scale. Shifting the highest personal income tax bracket up from its current $56,070 to the federal threshold of $115,739 would have cost the Quebec treasury $595-million – half the annual tax relief promised by Charest – but would have generated an estimated $348-million in increased GDP. This increase would itself generate tax revenue for the government while boosting investment and job creation. At a time when the provincial unemployment rate stands at 8.2%, Quebec would get a better bang for its buck by cutting taxes than by paying down debt.

Things get even worse when you travel down Highway 401. In Ontario, you’ll find a government unconcerned about either high taxes or high debt. Neither reality could prevent Premier Dalton McGuinty from dropping $1-billion last week on his favourite pet project, Toronto public transit. Extending a subway line was deemed more important than cutting taxes or balancing the books. Indeed, since 2004, the Premier has increased spending by 8.9% per year, while erasing all personal income tax gains made in the 1990s and failing to bring corporate tax rates down to a more competitive level.

The result has been a surfeit of tax revenue, but a slowdown in the economy. Projected employment growth in 2006 ranges from a low 1.4%, according to the Ontario government, to a positively dismal 0.9%, according to a forecast by Scotiabank. Contrast that with the average annual employment increase of 3.2% from 1997 and 2000 – the four years following the implementation of tax cuts by the Mike Harris government. At the same time, personal income tax cuts of 20% produced a 14.5% increase in income tax revenues.

But those lessons seem to be lost on the current administration at Queen’s Park. Instead of cutting taxes to stimulate economic growth and job creation, Premier McGuinty is throwing ever-larger amounts of public money at private industry. At a time when even the federal government is musing about scrapping ineffective subsidy programs such as Technology Partnerships Canada, Ontario has bucked the trend and earmarked $500-million for taxpayer loans to manufacturers. That’s on top of the $500-million the province already started doling out to the province’s automakers – which are now laying off thousands of workers.

Finally, lest one think Alberta, home to a 10% flat(tish) personal income tax and no provincial sales tax, is practicing the gospel of tax freedom, think again. While the province swims in a $4.1-billion surplus, the provincial Finance Minister declared that it would be «totally irresponsible» to use the money for a «one-time tax cut.» She seems to ignore the fact that if Alberta trimmed its spending, that tax cut could be permanent. The fiscal discipline this would impose on the province is long overdue. Oil booms don’t last forever, and the bigger the Alberta state gets, the smaller it will seem to shrink if revenues suddenly dry up.

When it comes to generating economic growth, lowering taxes is a surer recipe than increasing spending or reducing debt. Certainly, lower taxes must be coupled with spending restraint if governments are to avoid deficits. And politicians may find it more interesting to devise debt-repayment schemes, plot grand mega-projects or dole out corporate subsidies than to cut taxes and let market forces play out. But scoring short-term political points at the expense of long-term economic gain is bad economics – and bad politics. Quebecers, Ontarians and Albertans need to remind their leaders that the benefits of tax cuts – higher growth, greater productivity and prosperity – never went out of style.

Tasha Kheiriddin est vice-présidente exécutive de l’Institut économique de Montréal.