Broad-based tax cuts might be good public policy, but they look like poor politics at a time when the electorate is in an activist mood.
So what’s a conservative party to do? Answer: Turn to tax credits, which have the alluring sheen of tax cuts, plus snappy names – and the power to target slices of the electorate.
The federal Conservatives are moving enthusiastically in that direction in this election campaign, with at least 13 proposals in their platform to create new tax credits or to enhance existing ones.
There is the Construction Mobility Tax Credit, which would allow blue-collar voters to deduct up to $4,000 in temporary housing or relocation expenses from their taxable income. For seniors, the Tories are proposing to relax the rules for the Medical Expense Tax Credit to include home care.
Adoptive parents, small business, tech startups, apprentices in the trades: There’s a Tory tax credit for all of them.
As far as snappy names go, it would be hard to beat out the Canada Investment Accelerator tax credit, which would give a 5-per-cent tax credit for capital investments made in 2022 and 2023. (For small businesses, the first $25,000 in investment would be completely refunded.)
The largest proposed tax credit of all is for working parents, with the Conservatives saying they would turn the existing deduction for child-care expenses into a refundable tax credit (along with scrapping the Liberal plan to spend billions of dollars a year on expanded subsidized care).
The Conservatives position those proposals as tax reductions, but they are really just spending by another name, says Kevin Page, a former senior official with the federal Finance Department, a former parliamentary budget officer and currently, president and chief executive officer of the Institute of Fiscal Studies and Democracy.
“Bureaucrats see them as boutique spending programs,” Mr. Page says, adding he is skeptical of any claim that tax credits change the public’s spending habits or behaviour. Tax credits for transit, he says, typically flow to those who would have ridden on subways or buses in any case.
In many cases, the Tories’ proposals look to be aimed at putting money in Canadians’ pockets for things they are already doing, particularly in cases where the party would make those tax credits refundable. (Non-refundable tax credits can only be used to offset taxes owing, but refundable credits can still be paid out even after any taxes owing are completely offset.)
Expanding the adoption expense tax, and making it refundable, would put more money in the pockets of lower-income families that have adopted a child. The same is true of the proposal to create a refundable tax credit for child-care expenses.
But properly constructed, tax credits can provide incentives for economic growth, argues John Lester, executive fellow at the University of Calgary’s school of public policy. Broad corporate tax cuts can end up simply rewarding past decisions, he says.
Tax credits, however, can be tailored to only kick in for new spending or investment. On that front, Mr. Lester says he gives high marks to the Conservative proposal for a 5-per-cent tax credit for capital investments in the coming two years. While it may seem paltry at first glance, that level of tax reduction would significantly lower the rate of return that a company would need for an investment to be profitable – and thereby expand the range of investments that are economic.
But Mr. Lester says there can be too much of a good thing: The corporate tax credit program would be too much of a cash drain to be made permanent and would need to be scaled back if it were not terminated at the end of 2023.
Editor’s note: John Lester, executive fellow at the University of Calgary's school of public policy, said it is possible that an investment tax credit could be useful if targeted at industries that need to make substantial investments because of the pandemic, but that a broad-based credit as proposed by the federal Conservatives is not needed. Incomplete information appeared in an earlier version.
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