Proposed penny tax should follow penny into oblivion

Report by The School of Public Policy rebuts idea of 1% tax hike to fund municipal projects

In a report released today by The School of Public Policy, Professor Bev Dahlby examines a number of potential tax reforms for Canada, including the penny tax proposal of a 1% increase to the GST in order to fund infrastructure projects in cities.

Dahlby finds several problems with the penny tax proposal and therefore dismisses it as a valid tax measure.

“The main justification for this add-on to the GST – that the property tax is an inadequate source of tax revenue for funding municipal infrastructure – is not supported by trends in property tax collections and is at odds with the OECD’s recent endorsement of property taxes,” he writes.

Dahlby also highlights major legislative hurdles the penny tax would need to overcome and the high administrative and compliance costs it would carry.

In examining other areas of Canada’s tax system, Dahlby identifies provincial corporate income taxes as being high-cost revenue sources when compared to provincial HSTs. As such, he proposes a revenue-neutral switch from corporate to sales or personal income taxes.

“For Alberta, such a shift would yield up to $40 per dollar of tax revenue shifted from corporate to personal income taxes; for fiscal year 2011-2012, this would amount to a per capita welfare gain of roughly $19,000,” he writes.

The study can be found online here.