When it comes to tax reform, New Brunswick is preparing to “boldly go” where no province has gone before, as its government proposes sweeping changes to the personal and corporate taxation system in a new report entitled A Discussion Paper on New Brunswick’s Tax System.

Many are lauding the proposed changes, which are being debated in public consultation sessions around the province. “There are many positive things in this document,” says Niels Veldhuis, director of fiscal studies and a senior economist with the Fraser Institute in Vancouver. “If the more ambitious changes get implemented, it would signal one of the most significant tax reforms in Canadian history.”

One of the ambitious changes is eliminating the existing four-rate/ four-bracket personal income tax structure — which ranges from a rate of 10.12% for those earning $34,836 or less to a rate of 17.5% for those earning $113,273 or more — and either replacing it with a simpler system (two rates/two brackets of 9% for those earning $35,000 or less and 12% for those earning more than that) or eliminating it altogether and replacing it with a flat tax of 10%.

These options would mean decreases of about 15% in provincial personal income taxes for some New Brunswickers, while in other cases, the decreases would vary from 30% for higher-income earners to 100% for some lower-income earners, depending on which system is chosen.

The idea of a flat tax has critics excited — and dismayed. A 10% flat tax would mean New Brunswick would join Alberta in having the lowest personal income tax rates in the country, notes Veldhuis, who calls the concept “revolutionary.”

For many, however, the idea of a flat tax hits rock bottom. In a study prepared by the Canadian Labour Congress and the New Brunswick Federation of Labour in direct response to the government’s proposed changes, author Andrew Jackson states: “The discussion paper says absolutely nothing about the role of a progressive personal income tax as an important tool for income redistribution and equalization. Instead, it explicitly sets out to cut taxes for the relatively affluent on the unwarranted assumption that this will aid economic development.

“The paper provides no evidence on this point,” the study adds. “Many academic economists have, in fact, found that high personal income tax rates on the very affluent have very little impact on their work effort or savings.”

The N.B. government is also proposing reductions in the general corporate income tax rate to 10%, 7% or 5% from the current 13%. “There is a significant advantage in this, especially for a province such as New Brunswick, which does not have a large economy,” Veldhuis says. “Provinces such as New Brunswick need to put themselves on the map via good policy.”

The N.B. Federation of Labour, however, doesn’t believe this is good public policy. “This year alone, the province lost more than $15 million in revenue by phasing out the large corporate taxes,” says its president, Michel Boudreau, “revenue that we need to finance our public health system, our schools and other public services.”

The tax reform options, which also include the introduction of a carbon tax similar to that in British Columbia but at a lower level, are necessary for the long-term growth of the province, counters Finance Minister Victor Boudreau: “We think they can help us achieve our goal of becoming self-sufficient.

“Our goal is to grow the economic pie,” he adds. “By growing the pie, everyone will pay less.”

But in one way, at least, everyone will pay more. To counter the cuts to provincial coffers that will inevitably flow from the proposed tax reform, the N.B. government is recommending that the harmonized sales tax be raised by 2% to 15%, the level it was at two years ago.

Interestingly, it’s a suggestion that does not sit well with either labour critics or economists such as Veldhuis. The former are concerned about shifting the tax burden to low-income families, while the latter don’t feel there is any need for countermeasures to recoup lost revenue.

“If the province had held spending to inflation, it would have had more than enough money for the tax cuts,” Veldhuis says. “It needs to constrain spending.”

One thing seems certain, however: something significant needs to be done. “We realize we need to stand out,” says Boudreau. “As the premier says, we can’t just be tinkering around the edges.”

@page_break@The great unknown is what will ultimately be on the table when the N.B. finance minister brings down his budget next spring.

Public consultations are currently underway and the pro/con factions are out in full force. How close the final proposals will be to the discussion paper is simply too soon to call — but they will be contentious.

“Changing the tax system,” Veldhuis says, “is much easier to talk about than to do.” IE