Atlantic provinces should reduce business taxes to spur economic activity in region

A substantial body of research has shown that tax rates—including business income tax rates—in the Atlantic provinces are largely uncompetitive with neighbouring provinces and states across different types of taxation.

Currently, the four Atlantic provinces have the four highest provincial business income tax rates in Canada. Prince Edward Island has the highest rate (16 per cent) followed by Newfoundland and Labrador (15 per cent) and New Brunswick and Nova Scotia (14 per cent each). By comparison, the next highest rate in Canada is 12 per cent while the lowest rate is 8 per cent. Looking south, business income tax rates are generally higher in the Atlantic provinces than the six New England states.

Clearly, all four Atlantic provinces should lower their business tax rates.

Why? Because high business taxes put Atlantic Canada at a competitive disadvantage. Economic analyses have shown that business taxes are among the costliest forms of taxation, causing more economic damage than personal income taxes or sales taxes.

This should not be surprising. Taxing businesses at relatively high rates discourages investment, job creation and economic activity. Businesses are generally mobile and seek to generate the highest possible returns, meaning that all else equal, they will direct investment and economic activity to jurisdictions with the most competitive tax environments.

For the average person, high business taxes mean fewer jobs, less economic growth and ultimately lower living standards. In Atlantic Canada, incomes tend to trail the rest of the country and our neighbours to the south. One reason for this is the region’s relatively weak business and investment climate, with high business taxes playing a key role.

The good news is that the Atlantic provinces can lower business taxes without substantially reducing provincial government revenue.

According to a recent study, if the Atlantic provinces adopted an 8 per cent business tax rate, they would not only have a tax advantage over most of the rest of Canada but also over all the New England states, at a cost of between 1.6 per cent and 2.2 per cent of provincial revenue, depending on the province (using 2023 as an example).

However, this calculation does not factor in the positive economic impact from these tax cuts, which would spur investment and innovation that fuels economic growth and ultimately government revenue. Therefore, the actual revenue losses from such a cut are likely to be much lower than described above. And such a cut would create a relatively small impact on provincial budgets, one that could easily be recovered through spending restraint.

A strong business environment is key to securing robust economic growth in Atlantic Canada. While there are many areas of taxation where the Atlantic provinces are uncompetitive, few if any are more consequential than business taxes. To spur growth, policymakers in the region should reduce business taxes.