In these early days of deficit fighting, they are the big spending items untouched by the knife.
Canadians with good accountants know them well. Billions of dollars worth of credits and tax writeoffs for everything from construction tools to textbooks and kids’ sports fees have been piling up for years. Their expansion ramped up under the Conservatives before the recession hit. Now in leaner times, they continue to eat up cash.
Billed as tax “cuts” when they are announced by politicians, they live on in the federal books as “tax expenditures.” The semantic debate between politicians and academics continues as the number of credits rise.
The annual report detailing their cost runs for 24 pages. The latest numbers for 2010 will be released by Finance Canada as early as this week.
Meanwhile in Washington
In the United States, where public finances are far more dire, cutting tax expenditures is suddenly a hot topic. Washington’s official taxpayer ombudsman released a report Wednesday to Congress urging all tax expenditures be considered for repeal and that a regular “sanity check” be imposed to ensure any future credits make sense.
The report from the National Taxpayer Advocate comes on the heels of last month’s bipartisan report to President Barack Obama on debt reduction calling for tax expenditures to be scrapped as a way of reducing the deficit and simplifying the tax code.
So far, U.S. politicians have shown little interest in the advice. The political attachment to tax credits is strong on both sides of the border.
The politics
The success of Stephen Harper’s 2006 election campaign is closely tied to tax expenditures. Targeting specific voter groups, the Conservative Leader spent the campaign promising several relatively small, targeted tax measures. In office, the new government delivered on those promises, including implementing a Children’s Fitness Tax Credit, a Mineral Exploration Tax Credit, a Public Transit Tax Credit and tax writeoffs for meal expenses by long-haul truck drivers.
The opposition Liberals are already promising a new Family Care Tax Benefit – for people who are caregivers to a family member – as a central part of their next election platform, while the NDP regularly calls for an increase to the Canada Child Tax Benefit.
“They can be, politically, very seductive,” said UBC law professor David Duff, co-director of the National Centre for Business Law and an expert on tax expenditures. Prof. Duff said these measures should also be looked at in Canada as a potential source of savings. “Because the [Conservatives] have introduced them, they may not be interested in subjecting them to critical scrutiny, but maybe Parliament – other parties – could have committees actually examine these things more closely. I think that makes a lot of sense.”
The policy
The concept of “tax expenditures” was first introduced in 1967 by Stanley Surrey, a senior U.S. Treasury official. Its merits have been debated ever since. Advocates see such credits as a more efficient way for governments to address social issues without the need for burdensome federal programs. Critics say they complicate the tax system, forcing taxpayers to hire accountants or buy software programs in order to submit their taxes. There are also concerns that credits live on with little review as to whether they are still needed or effective.
In practice
The Public Transit Tax Credit was one of the most high-profile tax expenditures announced by the Conservatives in 2006. It was originally projected to cost more than $200-million a year, but has so far been coming in under budget at around $130-million a year. Four years in, experts are unable to say whether the program is encouraging new transit users or simply rewarding those who were taking transit anyway.
Michael Roschlau, president of the Canadian Urban Transit Association, said it’s a great idea to reward people for taking public transit, but the statistics do not show that the credit produced a spike in ridership.
“We have not been able to attribute a direct correlation between the ridership trends and the tax credit,” he said.
