September 13, 2004
There are solutions, says C.D. Howe chief
Tax system discriminates against construction
This may come as a surprise to the reader of this short piece: Our tax system is riddled with several provisions that discriminate against construction, especially nonresidential structures. Such discrimination is harmful to the economy since worker productivity depends strongly on capital investments in both machinery and buildings.
With less investment, businesses cannot update their technologies and therefore are unable to compete in Canadian and global markets.
Ultimately, workers are most affected since they are paid less or, even worse, lose employment when businesses are less productive.
The source of the discrimination is easy to point out. When it comes to federal and provincial corporate income, capital and sales taxes, large construction businesses face an effective tax rate of 34 percent on their investments, more than the 31 percent faced on average by all other industries in 2004.
• Some provinces, especially Ontario, use an out-dated approach of levying a higher corporate income tax rate on large construction and service firms, compared to manufacturing and resource companies.
• A high tax on construction is influenced by inadequate deductions for the cost of inventory that are significant part of the cost of doing business for this sector.
• Provincial retail sales taxes applied to capital expenditures by businesses on structures tend to fall significantly on the construction sector and, therefore increase nonresidential structures used by other businesses to produce products and services for domestic and international markets.Further, local industrial and commercial property taxes are sharply higher than property taxes paid by homeowners for almost all municipal jurisdictions.
Property taxes often discriminate against the building of multiplerental buildings as well, hurting most those who cannot afford to buy a home.
Federal, provincial and municipal governments need to look more carefully at the tax system to remove the bias towards construction.
The federal government has been on the right track by eliminating differences in corporate income tax rates across sectors and reducing the difference in tax rates applied on income earned by large and small firms.
With the 1991 adoption of the GST, the federal government removed a significant tax on business inputs faced by construction and other businesses. The federal government is also removing the federal capital tax by 2008.
Currently, a federal review is being undertaken to adjust tax depreciation allowances to better reflect the true economic depreciation costs.
This latter review could have significant impacts on the construction industry and the cost of nonresidential structures used by industrial and commercial enterprises.
Tax reform is much more urgent at the provincial level. Provinces with retail sales taxes should remove taxes on business inputs that affect the cost of new buildings and leasehold improvements.
Any differentials in corporate income tax rates among industrial sectors should also be removed at the provincial level.
Property taxes need to be sharply adjusted to reduce discrimination against nonresidential and rental property.
Politicians have their work cut out for them—but they can a build a more productive economy by eliminating discriminatory tax practices. They should get on with their job.
Jack M. Mintz is the president and CEO of the C.D. Howe Institute and the Deloitte & Touche LLP Professor of Taxation, J. L. Rotman School of Management, University of Toronto. He will be speaking at the 19th Annual CanaData Construction Industry Forecasts Conference on Wed., Sept. 22, 2004. For more information email canadataconference @reedbusiness.com
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