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Lesson spurned: The New Zealand sales tax experience

Would it have worked here? Looks like we’ll never know

Keith Halliday | Yukonomist

The Yukon Financial Advisory Panel has put the idea of a Yukon sales tax at the top of the political agenda.

Premier Sandy Silver has flatly ruled out a sales tax, but there are good reasons why the experts on the panel brought the idea forward.

It’s not because the Yukon government needs more revenue. Thanks in large part to surging transfer payments, its revenue has more than doubled since 2003-4, the first full year after devolution. That handily outstrips population growth and inflation. The Yukon government’s revenue per resident is $34,000, more than triple a province like Nova Scotia.

However, there are are good theoretical arguments for lowering income taxes and replacing the revenue with a sales tax (often called a consumption tax).

First, incomes taxes discourage work and investment. We want more of both. That’s why OECD data shows that most advanced countries get a much bigger mix of their tax revenue from consumption taxes than Canada or the Yukon.

Second, consumption taxes capture revenue from people that avoid income taxes either legally or illegally. If the rich have the money to pay accountants to organize fancy tax shelters, or money launderers or drug dealers don’t pay tax on their ill-gotten booty, then all of them still have to pay a consumption tax when they shop or go out for dinner.

Third, the Yukon can skim money from tourists, fly-in-fly-out workers and business visitors. These don’t pay income tax here and it would be nice to have them contribute to our infrastructure. Indeed, Yukoners today pay 100 per cent of the Yukon’s income tax revenues. The panel’s math suggests visitors would pay a quarter of consumption tax revenues.

Fourth, the rise of e-commerce puts our retailers at a disadvantage. Yukon retailers pay Yukon property tax, income tax and soon carbon tax. When Yukoners order from Outside websites, the Yukon government realizes zero revenue. Furthermore, Outside e-merchants often use complex tax avoidance strategies that a downtown Whitehorse small business, for example, isn’t able to do. Thus, the Yukon government may be inadvertently giving Outside websites an advantage over local businesses.

So that’s the theory. What about the practice?

New Zealand gives us an interesting example. The island nation is known not just for sheep, rugby and an awesome hut-to-hut hiking trail system, but also for its innovative tax policies.

For those who don’t follow the Journal of the Global Accounting Alliance, they published an interesting case study on New Zealand’s consumption tax.

The story starts during New Zealand’s economic crisis in the 1980s. At the time New Zealand’s left-leaning Labour government introduced a GST-style tax as part of bigger economic reform program that reduced corporate income taxes and also cut the highest personal rate from an eye-watering 66 percent to 33 percent. The sales tax rate was increased by the right-leaning National Party government in 2010, from 12.5 to 15 percent in a package with further income tax cuts.

The accountants see several lessons from New Zealand’s experience. First, the consumption tax was matched by income tax cuts to spur long-term economic growth.

I think the only way a consumption tax could work here is if the government can convince Yukoners it really will be revenue neutral, and then deliver on that. The B.C. government’s approach to their revenue-neutral carbon tax in its early years would be smart to copy. They published clear reports detailing the new revenues and offsetting tax cut figures.

The second lesson from New Zealand was to compensate poor people, since a tax on basics takes a relatively bigger chunk out of their incomes. This is what the federal GST rebate cheques do. Any Yukon consumption tax should mirror this approach.

The third lesson was to minimize exceptions. New Zealand’s consumption tax lets only four per cent of purchases off the hook. Australia’s, on the other hand, has over half of spending in exempt categories. The argument here is that keeping track and enforcing exceptions wastes a lot of resources by businesses and by the tax authorities for little benefit.

Take books for example. I love books. But if you exempt them then businesses and the tax agencies have to define what is a book compared to a booklet, magazine or flyer. Furthermore, why should millionaires not pay tax on their books (even if they are not about tax avoidance)? It’s better, the argument goes, to tax everything and give lower-income citizens a compensating cheque every quarter.

If the Yukon adopts a consumption tax, it is most sensible to have one that is harmonized with the federal GST so there aren’t a second set of rules, reports and forms to fill in.

So what would the economic impact of a consumption tax have on the Yukon economy? The debate is likely to be fierce. If the rhetoric in other jurisdictions is any guide, you’ll likely hear apocalyptic claims from both sides. The pro-consumption tax advocates will talk about unleashing unprecedented jobs and growth. The anti-consumption tax movement will talk about underhanded government tax grabs crippling the purchasing power of Joe and Jane Public.

The answer is probably that it would have moderately beneficial results, as long as it really is revenue neutral. The things that may tip the balance in the consumption tax’s favour are the opportunity to shift some of Yukoners’ current tax burden onto visitors and the need to raise money from out-of-territory e-commerce.

The economic strategy of New Zealand, including its consumption tax, has worked pretty well. They are number 7 in the world on the OECD’s Better Life index, and they are middle of the pack in the OECD club of rich countries in terms of both income and social equality.

But since politics won out over expertise with Silver’s flat refusal of a sales tax, it appears we’ll never know.

Keith Halliday is a Yukon economist and author of the MacBride Museum’s Aurore of the Yukon series of historical children’s adventure novels. He is a Ma Murray award-winner for best columnist.