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Brooking no favorites: a new approach to regional development in Atlantic Canada

  • Year: 2003
  • Author: Mintz, Jack M; Smart, Michael
  • Journal Name: Commentary - C.D. Howe Institute
  • Journal Number: 193
  • Publisher: C.D. Howe Institute
  • Published Location: Canada
  • Country: Canada
  • State/Region: Atlantic Canada

Since 1988, the federal government has transferred nearly $4 billion to businesses, governments and non-governmental organizations in the Atlantic provinces through the Atlantic Canada Opportunities Agency (ACOA). Recently, a number of critics have called for a re-examination of the agency's mandate and a fundamental reform in the way that regional development assistance is delivered, including substituting corporate tax cuts for Atlantic businesses for ACOA grants. This Commentary evaluates the case for regional development reform. It argues that Ottawa should replace business grants with tax measures directed towards investment, while revamping federal Atlantic investment-tax credit that has been poorly structured in the past.

We estimate that the federal corporate income tax base in the Atlantic provinces is approximately $3.8 billion in a typical year. Therefore, on a revenue-neutral basis, and ignoring the fiscal effects of behavioral responses to the tax change, the federal government could eliminate ACOA net spending equal to $250 million with a corporate income tax-rate cut of 6.5 percentage points for both large and small business income in the Atlantic region. There are several advantages to Atlantic Canada of a corporate rate reduction. It benefits all industries and businesses that pay taxes. Lower taxes reduce the cost of investment projects and increase the competitiveness of businesses operating in the Atlantic region. As well, a lower federal-provincial corporate income-tax rate -- about 30 percent -- would be substantially below the statutory rates of other provinces and somewhat below the OECD average corporate income-tax rate (Mintz and Chen 2000). A low corporate income-tax rate will attract companies with high profitability, as well as signal investors that a region is conducive to investment (Technical Committee on Business Taxation 1998). And a low corporate income-tax rate will provide incentives for businesses to shift taxable profits through financial and other transactions from high-taxed jurisdictions to the Atlantic, without moving business components, such as labour or capital.

A regional development policy more likely to be successful, in our view, is a broad-based corporate tax cut in the Atlantic region. A proposal heard from some quarters in Atlantic Canada is to cut the federal corporate income-tax rate for large and small businesses that would bring effective Atlantic tax rates on capital to about half the level found elsewhere in Canada. However, we believe that this policy would lead to substantial shifting of income from other provinces into the Atlantic region, without necessarily increasing capital investments there. A better alternative is one that is more directed at investment. We propose that the current federal Atlantic investment-tax credit should be revamped into a broad-based measure that applies to all industries and capital goods, and expanded in size to offset the loss of ACOA payments. The effect of the policy would be to virtually eliminate taxes on marginal investment projects in the region. That is a reform that could redraw the economic contours of Atlantic Canada.

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