$100-billion in expenditures that no one notices

OttawaCitizen.com – opinion/op-ed
January 23, 2012,   By Bob Plamondon, The Ottawa Citizen

Take a 20-minute ride in a military helicopter and it’s front-page news for a week. But release a government report on more than $100 billion in tax expenditures, as Finance Canada did this month, and few of us pay attention. But even if Canadians gloss over what might look like complicated tax jargon, this is an area of public policy that our parliamentarians should put under a microscope to ensure we are getting the best bang for our bucks.

Tax expenditures are the provisions in the tax code, typically in the form of credits and special deductions, which reduce the tax that individuals and business pay. Make a charitable donation, contribute to your pension, buy a transit pass or enrol your child in a fitness activity and you pay less at tax time.

Tax expenditures serve a public policy purpose without the need of an army of bureaucrats in administration. They can be implemented virtually overnight, and can be easily tweaked. As easy as they are to implement, they are very difficult to take away.

Canada is a leader in the use of tax expenditures in the sense that our uptake is more than 50 per cent above the OECD average. While conventional thinking is that the Conservative government has cluttered the system with new credits and has made the system more expensive, the reality is otherwise. While it’s true that the number of boutique credits has increased, the level of tax expenditures has grown only modestly since Prime Minister Stephen Harper came to power. In the past five years the value of tax expenditures has risen 2.3 per cent, far less than the increase in the size of government.

This does not mean that the government should be let off the hook. Tax expenditures represent a major claim on the federal treasury and their economic and social benefits need to be put to the test.

The problem is that parliamentarians give tax expenditures only passing notice. While Parliament has a process to review regular spending, no system exists to review tax expenditures. Although Finance Canada conducts the occasional review, they admit there is “no formal mechanism for tax expenditure review by cabinet after provisions have been approved in the budget.” In contrast to government programs, which are reviewed every five years to ensure relevance and effectiveness, tax expenditures are left to dangle, hardly the high-water mark for excellence in public policy.

Since reducing tax expenditures is more akin to raising taxes than cutting government spending, we should not look at tax expenditures as a place to reduce the deficit (unless you believe that raising taxes is a good idea). But if we eliminated or reduced the poorly designed tax expenditures we could increase the tax credits that have a bigger impact. For example, by re-profiling just 1.5 per cent of tax expenditures we could double the Child Tax Credit. This way more people win, rather than a select few.

While many tax expenditures that don’t warrant in-depth study, such as the basic personal tax exemption, there are others that can be questioned on the grounds of basic fairness and equity.

I suggest the finance committee of the House of Commons takes up the challenge and put tax expenditures under its microscope. To encourage them along, here is the first $10 billion in tax expenditures that I believe are worthy of investigation:

■ Non-taxation of business-paid health and dental benefits: $3.155 billion. It’s hardly fair that those who work in the public sector and for major employers get this benefit while many who work for small business and in the not-for-profit sector are shut out. Dentists will fight this change tooth and nail.

■ Scientific Research and Development Investment Tax Credit: $3.655 billion. Recent studies have shown that this system is complex and does not produce the benefits intended. Accountants, who count on the system for big bucks, won’t be impressed.

■ Deduction of union dues: $795 million. It’s difficult to justify the political activity of a union as qualifying for an income tax deduction. The loss of the deduction might cause unions to become more focused, but it might also cause the unions to go to war.

■ Employee stock option deduction: $ 725 million. It’s a good thing when employees have a stake in the companies they work for, but why should the taxpayers be part of the equation?

■ Non-taxation of workers’ compensation benefits: $645 million. Why discriminate between different sources of income. A buck is a buck is a buck.

■ Flow through share deductions: $280 million. Investments should be justified on economic rather than income tax considerations. Special deductions distort investment choices.

■ Northern Residents deduction: $165 million. Unless you live in the North you have probably never heard of this deduction. I doubt it’s a reason why people live where they do. And where the line is drawn is arbitrary.

■ Moving expense deduction: $135 million. People move for all kinds of reasons. Just because you want to live closer to a family member should not give you a tax deduction.

■ Labour-Sponsored Venture Capital Corporations Credit: $130 million. There is no shortage of people who invested in these schemes for tax reasons, but who have lost their shirts in the process. Could this credit be doing more harm than good?

■ Deduction for clergy residence: $85 million. To any other Canadian, the provision of free housing from an employer is a taxable benefit. Why should the clergy get this break?

Reducing certain tax expenditures is a difficult and painful exercise that would cause heat for politicians. But isn’t this the sort of work we expect from our parliamentarians?

Bob Plamondon is the author of Blue Thunder: The Truth about Conservatives from Macdonald to Harper.

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