A blue-ribbon panel of tax experts has proposed a bold overhaul of Quebec’s tax system that would introduce a new tax mix by slashing $5.9 billion in Quebec personal and business taxes while increasing consumption taxes and fees in a bid to spur economic growth, job creation, and make the province a more competitive place to invest.
The sweeping reforms, which represent a marked shift in tax policy by shifting the reliance on income taxes to provincial sales tax and user fees, could serve as a model for other provinces as they too are grappling with an ageing population and sluggish government revenue growth, said Stephen Gordon, a professor of economics at the Université Laval.
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“We’re going to need public finance to come from somewhere and we can’t count on an ever-expanding working population to generate economic growth,” said Gordon. “If you ask the question to other provinces about what they can do to accentuate economic growth and keep the level of tax revenues going, they are going to get the same answer as the report came out with.”
“The Godbout panel did a collossal job,” said Daniel McMahon, FCPA, FCA, president and chief executive officer of the Quebec CPA Order. “They conducted an analysis that was done with a lot of rigour and objectivity. But once the report is tabled, it’s in the hands of politicians. The report is meant to be taken as a whole. If the government cherry-picks among the measures without taking into account its coherent (vision), then it could have a perverse effect.”
The eight-member committee, which examined almost 300 provincial tax measures and analyzed 280 briefs and 17 external studies prepared at its request, asserts that its proposed reforms would increase GDP by $2 billion, boost personal disposable income by nearly $600 million, and lead to the creation of 20,500 jobs. It also boasts that the tax reform would be tax neutral as is not intended to generate new revenues for the government. “The proposed changes must be self-financing and neither increase nor decrease the overall tax burden,” said the report.
More controversially, the Godbout proposes jettisoning a number of business tax incentives. It recommends eliminating tax credit refunds for large business, which in the long run would generate recurring savings of $325 million. It also advises replacing existing small business deductions, which cost $550 million, with the introduction of a “growth premium” to encourage them to grow.
“The report is absolutely bold because it proposes changing the tax system altogether,” said Albert De Luca, a tax partner and national leader of the global R&D and government incentives group at Deloitte. But he says that the report goes too far when it recommends substantially reducing tax credits for sectors such as R&D, multimedia, and video. “Quebec has always looked at the incentive system to help because economically speaking when you are investing, that is when you need help,” added De Luca. “When you are investing you typically have losses, and if you have losses you should have incentives paid to you. That’s a case where they were too bold.”
Just as controversially, the Godbout report proposes an increase to the provincial sales tax, from the current 9.975 per cent to 11 per cent, and a slew of new or increased consumption taxes on excess hydroelectricity usage, insurance premiums, tobacco products, gasoline and diesel, alcohol. An increase in consumption taxes would generate $2.665 billion in additional tax revenues, according to the panel. “Generally speaking, the studies reveal that direct taxes are more detrimental than indirect taxes,” affirms the Godbout report.
De Luca counters that an increase in sales tax would be counterproductive. “It almost becomes a direct tax as opposed to a consumption tax, and at that point remember we have the United States next door and people don’t mind travelling to the U.S. to buy staff,” observed De Luca.
The head of research at the Montreal Economic Institute concurs. According to economist Youri Chassin, the provincial government should forge ahead with some corporate and personal income tax cuts but resist the urge to increase the provincial sales tax. In fact, he believes the reforms proposed by the Godbout report should not be tax neutral. “It’s a question of competitivity,” said Chassin. “We are already highly taxed. It should not be tax neutral. The government should above all not increase the tax burden of Quebecers.”