Ron Kneebone, a University of Calgary economist and financial panelist, speaks at a media briefing Sept. 12. (Joel Krahn/Yukon News)

Financial advisory panel pitches sales tax to help balance Yukon budget

Economists’ favoured method panned by Yukon Party, NDP critics

With the prospect of future budget deficits looming, the Yukon government has been handed a series of draft options for how to improve the territory’s books.

The choice is to either manage spending plans, raise revenue, or some combination of the two, according to a draft report by the territory’s financial advisory panel released this week.

If the Yukon is going to raise revenues, a new sales tax is the way to go, they say.

“Over the last 10 years spending has been growing a little bit faster than revenues,” said panelist and University of Calgary economist Ron Kneebone Sept. 12.

“Although it’s only a relatively small difference, if you allow that to happen for a decade or more it starts to have serious implications for your financial situation and your future choices.”

The government’s own projections predict the territory will be facing deficits starting next fiscal year if nothing changes.

Curtailing spending plans

The government’s budget forecast includes plans to increase government spending by two per cent per year from now until the 2020-21 fiscal year.

If this growth rate is maintained beyond 2020, then the territory is on track to balance by 2022-23, according to the advisory panel report.

If the territory wants to be back to balance sooner, the government needs to spend less than it’s planning to.

To balance by 2020-21 spending increases need to stay at one per cent. If spending levels are frozen at the levels they’re at this year, balance could be achieved by 2019-20, according to the report.

According to this year’s budget, a one per cent reduction in spending growth appears to work out to between $10 million and $12 million.

HST

If the government decides to dig its way out of the hole by raising revenues, the panel believes a harmonized sales tax, or HST, is the way to go.

“If the choice is to raise additional revenue, the preferred way of doing it is with the sales tax,” Kneebone said.

A one per cent HST would raise about an extra $7 million a year even with expanded low income rebates, the report says.

It provides a few different options for what the tax might look like if it’s combined with spending changes.

If spending grows at two per cent, a four per cent HST would balance the budget by 2020-21.

If spending grows at 1.5 per cent with a four per cent HST, balance would happen by 2019-20.

If spending grows at 0.5 per cent, a two per cent HST would allow for balance by 2019-20.

Visitors now spend more than $300 million per year in Yukon, according to the panel. If two-thirds of that money now had an HST attached, “then visitors end up paying roughly one-quarter of the total potential HST revenue earned by the government,” the report says.

Money raised by an HST could be used to lower other taxes.

A five per cent HST would give the government enough money to raise the personal income tax exemption from $11,635 to $20,000, “ensuring 6,500 Yukoners pay no income taxes at all,” the report says.

At the same time the government could reduce the number of income tax brackets from five to three and lower the general corporate income tax rate to 10 per cent.

“Due to the high contribution to HST revenue from non-Yukoner visitors, Yukoners as a whole will see tax liabilities fall by more than the HST paid,” the report claims.

As Kneebone explained it, collecting taxes based on consumption is economists’ preferred way to tax.

“I’m not discouraging you from working with a sales tax whereas I do with an income tax. You can still avoid the sales tax by spending less and that has some attraction too because it encourages you to save more and that’s generally deemed to be good for the economy.”

Both opposition parties are against the idea of a new tax.

Yukon Party MLA Brad Cathers said the government needs to manage its spending and grow the economy, not create a new tax.

“With the potential of the Liberal’s planned carbon tax and now, the looming potential of a sales tax, this is the type of thing that does cause immediate concern for small business owners,” Cathers said.

Cathers said the government should look at its capital spending for each year “and potentially, just as we’d shown in the last budget tabled, having less government capital spending in certain years to ensure that we weren’t getting into debt.

“We’d also be looking at making decisions when departments are requesting their resources.”

NDP MLA Kate White said a new tax would disproportionately affect low income earners “as opposed to someone who makes more than $100,000, where far less of their spending is going to be affected by the HST.”

White said she’s concerned by the panel’s suggestions around the Yukon healthcare system.

The panel wants the government to consider a “comprehensive” review of the healthcare sector “focusing on the factors driving costs and on the quality of the outcomes being delivered to Yukoners,” according to the report.

The report provides examples like contracting out to private firms some diagnostic work to mobile labs or clinics or considering privately operated but publicly funded surgical facilities.

“It essentially talks about the privatization of healthcare,” White said.

The idea of using the HST to lower the income or corporate taxes is also problematic, she said.

The corporate tax rate was just reduced this year from 15 per cent to 12 per cent.

“We’ve just gone from 15 to 12 and they are suggesting going down to 10,” she said.

If the government does choose to create a new tax, it’s not going to be an easy process. The Yukon’s Taxpayer Protection Act says a new tax needs to be put to a referendum before it can become law.

“If they were to put the sales tax to a referendum I would be quite surprised if they would receive the support of Yukoners,” Cathers said.

Carbon Tax

The panel also considered what the new federal carbon tax, planned for some time in 2018, might look like in the territory.

“It’s coming and I think if we didn’t talk about the carbon tax you’d be sitting there saying why aren’t we talking about something that we know is coming,” Kneebone said.

To make the carbon tax revenue neutral, as the government has promied, the panel suggests handing out a universal cost-of-living credit of $300 per year and lowering personal and corporate income tax rates by 20 to 25 per cent. That cost-of-living credit could be increased to $500 if the territory had an HST, the report says.

Premier and Finance Minister Sandy Silver was not immediately available for an interview.

In a statement Silver said he supported the panel’s work.

Members of the financial advisory panel are travelling to 15 Yukon communities in September and October to discuss their draft report.

Members of the public can also comment on the recommendations via a survey, written feedback or an online discussion forum.

More details on the draft report are available online at www.yukonplans.ca.

A final report from the advisory panel is expected by the first week of November.

Contact Ashley Joannou at ashleyj@yukon-news.com

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