Provincial and State Corporate Taxes

The following commentary also appears on The Globe and Mail’s Global Exchange blog:

What Obama’s Corporate Tax Proposal Means for Canada

Last week, there was much consternation in Canada’s business press that some modest reversals of provincial corporate tax cuts and President Obama’s proposed corporate tax changes could erode our competitiveness. Canadians should maintain a healthy skepticism about possible U.S. corporate tax cuts and include states as well as provinces in the comparison.

The Globe and Mail ran the headline “As U.S. eyes tax cut, Canada’s competitive edge at risk” on the front page of Thursday’s Report on Business. In Friday’s Financial Post, Jack Mintz also referenced Obama’s proposal in urging provinces to “Stay the course; Keep corporate tax rates low.”

In a 1999 paper entitled “Why Canada Must Undertake Business Tax Reform Soon,” Mintz wrote, “Canada’s fiercest competitor, the United States, is now looking at its taxation measures, which could result in substantial tax cuts, perhaps for businesses as well as individuals in the future.” Since then, Canada has slashed its federal corporate tax rate in half while the U.S. federal rate remained unchanged.

For over a decade, advocates of lower corporate taxes have been urgently warning about possible cuts south of the border to justify actual cuts north of the border. Canadians should wait to see what, if anything, the U.S. implements before worrying about cross-border competition.

It’s also important to compare apples with apples. The Globe reported:

Federal Finance Minister Jim Flaherty has steadily cajoled provincial governments to cut business taxes since 2007, with the goal of bringing the combined national corporate tax rate to 25 per cent. Now at just over 26 per cent, the minister’s target appears in reach – but the campaign is suddenly losing steam.

. . .

Yet in the U.S. capital on Wednesday, President Barack Obama unveiled a proposal that would cut the top U.S. corporate tax rate to 28 per cent from 35 per cent, while offsetting lost revenue by closing tax loopholes.

These figures, 26 versus 28 per cent, imply a near elimination of Canada’s “competitive edge.” But while 26 per cent is a combined federal-provincial rate, 28 per cent would be just the U.S. federal rate. All except four American states levy further corporate taxes.

Seventeen states and the District of Columbia have corporate income tax rates of eight per cent or higher. Since state taxes are deducted from profits in calculating American federal corporate tax, a state rate of eight per cent and a federal rate of 28 per cent would produce a combined U.S. rate of 34 per cent.

By comparison, provincial corporate tax rates range from 10 per cent (Alberta and New Brunswick) to 16 per cent (Nova Scotia and Prince Edward Island). Given a federal rate of 15 per cent, Canada’s combined rates range from 25 to 31 per cent.

Even if Obama’s lower federal rate were implemented, Canada could still increase corporate taxes while staying below U.S. rates.


  • “Even if Obama’s lower federal rate were implemented, Canada could still increase corporate taxes while staying below U.S. rates.”

    Are you embracing regulatory arbitrage?

  • There is no such thing as a “competitive edge” when it comes to corporate taxes–unless your jurisdiction effectively levies no tax on corporate profits. There are very few corporations that make business decisions solely on the basis of the tax environment–indeed, many will settle for higher taxes if there are corresponding beneficial trade-offs.

    A case in point: Caterpillar’s recent move from London, Ontario, to Muncie, Indiana. The company now has a higher corporate tax rate–something like 40%–versus 28% in Ontario. In addition, they were given a grant of $5 million from the federal government to remain in Ontario, yet they still left. However, Indiana is now less union-friendly than Ontario, which seems to have been the impetus behind the move.

    When this topic is raised, I always think about banks. Are we afraid that Scotiabank is going to give up Canadian deposits and move to Muncie, Indiana, as well? Most of the corporations arguing most forcefully for corporate tax reductions are the very companies that have nowhere else to do business. So why do we constantly cater to them?

    Ireland, incidentally, has long maintained a disgustingly low corporate tax rate. Is anyone truly afraid now of losing their competitive edge over Ireland?

  • I agree that the notion of a “competitive edge” in corporate taxes is pretty dubious and put it in quotation marks for that reason. My point is that, even if one believes that Canada should maintain such an edge relative to the U.S., there is still room to raise Canadian corporate taxes.

  • Yes, I noted the quotation marks–but I think, in addition to just making a general statement, I was responding to this: “Canadians should wait to see what, if anything, the U.S. implements before worrying about cross-border competition.”

    My point is that Canadians have nothing to worry about in terms of competition–but, yes, much to worry about in terms of manufactured fear on the part of finance ministers and “experts” like Mintz and Drummond…

  • Amazing that in this era of low corporate taxes and the theory that it is supposed to create jobs, we have reports coming out that note we have lost over 500,000 jobs in manufacturing.

    And by the way, I wrote a piece two years ago that appeared in, CCPA The Monitor (I think it was December 2010 )that showed we lost 500K jobs in manufacturing in the last 10 years. Somehow manufacturing was viewed as a twilight industry by major policy pundits in 2010 and not a mention by anybody that indeed these joblosses were a problem! Amazing how the discourse can change so quickly. Yet for some reason it does not translate into the political. High taxes, are the cause according to the political players of the day yet in the last several days bank economists have come out with a recognition that the Dutch disease created by the high oil and commodity based dollar is the causal variable behind the center piece in the de-industrialization of Ontario and Quebec.

    The corporate tax cuts have done very little in attracting investment and if anything will only make the situation worse, as this means even less revenue for governments and more austerity. This goes against the whole notion of building a high wage/ good jobs/ innovative economy which now seems to be in vogue! How long have we been bitching about that on this blog???? like since 2006?

  • Is the United States even Canada’s fiercest competitor? Seriously. How much of our exports to the US these days consist of goods that they also make? Perhaps more to the point, how much of our domestic production competes with exports from the US? How many of our manufacturing job losses are a result of competing with production in the US?

    Doubtless some, but it could reasonably be argued that our fiercest competitor is not the US at all but China, among other low-wage sweatshop producers. Which in turn brings up questions like, should we be competing with that at all? Is it perhaps time to do a cost/benefit analysis of some sort, with the money saved from cheaper widgets on one side of the ledger, and the money lost because of job losses and downward wage pressures on the other? I think as a country it wouldn’t be hard to conclude that we’d be better off slapping on some tariffs and making the stuff ourselves.

  • The focus on corporate income taxes drives me nuts. These are about the least important expense for businesses. A company only pays corp tax if it makes a profit, unlike, say, property taxes and power rates and a zillion other expenses and charges. Obviously an expense that is paid even when a company is experiencing losses is a lot more important than one paid only when a company is experiencing profits. Moreover corp taxes are deductible (more or less) from dividends, so for corp.’s that actually pay their shareholders a portion of their profits, decreases in corp. tax usually result in a decrease in net after tax income for shareholders (and this includes all the Canadian banks many of whose shareholders are there for the dividends), so the net effect is closer to zero. I find Mintz’s quantitative work about as close to incomprehensible as it is possible to get – but I believe he purports to show that a higher marginal rate of corporate tax (not the average rate) affects location decisions, everything else being equal. But everything else is not at all equal, so the critical question is how important is corp. tax (or the marginal rate) compared to other factors affecting location decisions, and I do not believe Mintz’s work addresses this question. I also think that Mintz fails to take into account the deductability of corp tax from income tax for shareholders, but I could be mistaken about this.

Leave a Reply

Your email address will not be published. Required fields are marked *