The Yukon doesn’t have a revenue problem

A sales tax is a good idea, but only if it’s accompanied by cuts to spending and income tax

On the way back from my moose-hunting trip, I wondered what would be on the front pages.

I was expecting Donald Trump and North Korea, but not proposals for a Yukon sales tax.

The idea, long a favourite discussion topic of fiscal policy nerds like me, was floated again last week by the Yukon government’s new financial advisory panel. The group, composed of two Yukon and three Outside experts, is looking at how to fix the Yukon government’s finances.

It’s an idea worth discussing, on the condition that the new revenues be used to lower income taxes.

Canadian governments rely on income taxes to a greater extent than sales taxes, compared to many advanced countries. This is bad, since income taxes effectively discourage work, savings and investment. Sales taxes target consumption, and capture spending by those who dodge income taxes (either legally or illegally). And, as I’ve written before, sales taxes in other places with lots of visitors succeed in capturing revenue from visitors and lighten the tax burden on locals. PEI and Skagway even have special rules to partly shield locals, either by having higher rates in tourist season or by exempting things visitors don’t use such as home heating fuel.

The panel says that visitors spend $300 million per year in the Yukon which could be skimmed using a sales tax.

The sales-tax idea has never gone very far with previous governments. This is a real opportunity for the new Liberal government to show courageous political leadership.

A five per cent sales tax would raise $35 million, even after GST-style rebates to low-income Yukoners. This would allow big cuts in personal and corporate income tax, including raising the personal exemption from $11,635 to $20,000. The latter move would mean 6,500 Yukoners would pay no personal income tax at all.

On the new carbon tax, the panel says that it could be revenue neutral with a universal cost-of-living credit of $300 per year plus cuts to personal and corporate income taxes.

The report is worth reading. If not the full 99-page version, then the 33 pages packed with fiscal fun in the executive summary.

Taking a step back from the details, the Yukon has some strategic choices to make about its finances. As a peripheral economy, far from population centres and industry hubs, it is a challenge for us to attract private-sector investment and jobs.

Think of a spectrum. On one end are places like New Brunswick or Nova Scotia, which have high taxes (among the highest in North America), high debt and a high reliance on government spending in the economy. At the other end are places like Estonia, Ireland and Alaska. The latter strategy is to have low taxes, attract lots of investment, and grow jobs and the economy.

Alaska isn’t a perfect example here since they have so much oil, but Estonia and Ireland have been relatively successful growing their economies despite being peripheral and having little in the way of natural resources.

The Yukon, meanwhile, has been growing spending significantly faster than inflation and population growth over the last decade. A decade ago, the Yukon government survived on only $824 million in revenue. Since then revenue is up to $1.289 billion, a 56 percent increase while inflation and population growth over the period were only 16 percent each.

And picking 2007 as a base year misses the boom transfer payment years just before that. If you go back to 2003-04, the first full year after devolution, Yukon government revenue has more than doubled.

Today, Yukon government revenue per resident is $34,000, more than triple even Nova Scotia’s level.

In short, the Yukon government does not have a revenue problem. It has a spending problem.

In an earlier column, I described the concept of the “jaws.” If you grow revenue faster than cost, which creates a “jaw” shape on budget charts, then the effect of compounding can quickly turn around your financial situation. The panel notes that even if there were no cuts to Yukon government spending, and spending was simply kept at this year’s level, the budget deficit would disappear thanks to growing revenues by 2019-20.

If our politicians can’t bring themselves to do something relatively simple like freeze spending for three years after more than a decade of epic increases then we have a bigger problem with our government’s effectiveness.

More broadly, if the Yukon government uses a new sales tax or carbon tax that is not revenue-neutral to solve the problem by raising new tax money, it takes us further along the spectrum from Estonia towards Nova Scotia and New Brunswick, which are not models of economic success. This means it gets less attractive for people and businesses to locate in the Yukon. And having reasonably low taxes sure helps when we are faced with higher costs of living and transport costs than locating in Canmore or Kelowna.

If the government brings in a sales tax without matching income tax cuts, they might as well double down by also abolishing the Department of Economic Development.

It’s good that the new government commissioned the panel of experts to get us talking about Yukon government finances. However, if the government ends up choosing to raise taxes when it already has plentiful revenue then you should give your MLA an earful.

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.

economicsFinancesincome tax

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