Jack M. Mintz is the President’s Fellow, School of Public Policy, University of Calgary. He is also a special advisor to the Business Council of Alberta.
With the Alberta government reducing its corporate income tax rate from 12 to 8% by January 1, 2022, the federal-Alberta combined corporate income tax rate in Alberta will be 23%, below every other province and close to the lowest U.S. corporate tax rates of 21% including Texas. This will certainly help Alberta improve its competitiveness.
However, many criticisms have been made that the corporate reductions shall have no impact on investment or jobs while costing a lot of money. This is conjecture so far. The first point reduction in the corporate income tax rate only happened July 1, 2019 (with the second following January 1, 2020). Investment plans take time to be put in place and no economist would ever argue that the large-scale investment impacts would be so immediate, especially if tax cuts are phased-in over four years. Instead, the impact should start being realized in 2020 and largely known by 2023.
Corporate tax reductions helped lead to a lower unemployment rate as well as boosting wage growth to 5.2%, highest for lower-income workers.
Jack M. Mintz
Phasing in the rate reduction helps reduce the initial cost. The Alberta Government forecasts that the four-year cost is $4.7 billion, but this is halved to $2.4 billion after accounting for corporations restructuring their businesses to shift more profits to Alberta. By 2020, the annual cost will be roughly $700 million per year. This is a small cost for a large gain in jobs – estimated to be 55,000 by 2024.
It is therefore not surprising the many countries around the world have been encouraging growth by corporate tax rate reductions. In the past two years alone, significant rate reductions have occurred in Belgium (9 points), France (8 points), India (9 points), Netherlands (4.5 points), Switzerland (4 points) and the United States (14 points), to name a few. Overall, the industrialized GDP-weighted corporate income tax rate has fallen by five points from 31% in 2017 to 26% today. Alberta is now competitive by international standards.
To understand what a large rate reduction can do for an economy, we need to look no further than the United States. Business confidence reached an all-time high in 2018 with private investment booming by 8.1%. Along with deregulation in 2017, the corporate tax reductions helped lead to a lower unemployment rate as well as boosting wage growth to 5.2%, highest for lower-income workers.
The American experience confirms many empirical studies that have concluded that corporate tax reductions encourage investment and job creation. But taxes are not the only factor influencing investment. As we have seen in the United States, the 2019 tariff wars created uncertainty for businesses and a decline in confidence; investment slowed for this reason.
In Alberta, the 2015 hikes in corporate tax rates from 10% to 12% were ill-timed as investment plummeted. The hefty decline in oil and gas prices, federal and provincial carbon and other tax hikes, new environmental regulations, and pipeline capacity constraints all lead to a sharp fall in business investment – by almost two-thirds. It is not surprising that instead of the government getting more revenues with a tax hike, corporate taxes paid by large corporations were on a free-fall, declining from $5.8 billion in 2014-15 to $3.4 billion in 2017-18. The 2015 corporate tax hikes were clearly not the sole cause for the fall in investment – corporate revenues, as well as other factors, played a larger role. Nonetheless, 2015 corporate tax hikes were like another football player piling on the quarterback.
The investment climate in Alberta is now more hopeful. With an improved outlook for new pipeline capacity (TMX and Enbridge’s Line 3), businesses can take advantage of provincial steps to ease tax and regulatory burdens for businesses. The federal government also introduced accelerated depreciation to encourage investment. The biggest issue down the road is whether federal 2050 carbon targets, based on no plan nor any economic cost study, will continue or not to put a pale on oil and gas investment in Alberta.
Nonetheless, we have to remember that Alberta’s economy has become more diversified and will need to continue doing so in the coming years as the world reduces oil and gas demand in this century. Instead of two-fifths of the economy in 1997, the energy sector accounts for only 30% of nominal GDP today. Corporate tax reductions support diversification by encouraging investment in all Alberta industries. The corporate tax cuts are most meaningful to the service and construction sectors where effective tax rates are highest in Alberta.
Read more: Economic diversification in Alberta
Thus, Alberta is well-served by several benefits arising from corporate tax competitiveness. Competitiveness supports a healthier investment climate, which is strongly needed at this time. It helps boost employment and wages over time. It is an excellent policy to support diversification without governments trying to pick winners from losers. And, the Alberta Government will also benefit from more personal, property and other revenues as companies invest and hire workers.
No wonder so many countries have used corporate tax policy as a growth strategy. Alberta is no different.