03 Jun, 2014

IMFG Paper Makes the Case for a New Local Business Tax

The Institute on Municipal Finance and Governance (IMFG) has released a paper  by IMFG Senior Fellow Richard M. Bird that makes the case for a new tax for local government: the Business Value Tax (BVT).

The paper concludes that a local BVT is economically preferable to other forms of local business tax, administratively manageable, and could be politically desirable. The BVT would be especially suitable for large cities and metropolitan regions, and could be an important funding source for urban infrastructure.

Local governments in Canada primarily tax businesses through the property tax, often by applying heavier effective tax rates on business property. The BVT offers a better option.

The BVT is a value added tax (VAT) like the Canadian federal government’s Goods and Services Tax (GST) and the Harmonized Sales Tax (HST) used in Ontario and the Atlantic provinces. Unlike these existing taxes, however, the BVT taxes business income rather than sales.

In recent years, several countries with VATs like Canada’s GST – notably Italy, France, and Japan – have introduced a local business tax along the lines of the BVT. The BVT is better than the discriminatory real property taxes currently levied on businesses in Ontario and other provinces. It would also be complementary to existing taxes like the GST and HST, and could fit better into the existing provincial-municipal fiscal infrastructure.

The paper, called A Better Local Business Tax: The BVT, outlines how a BVT works, shows how it differs from the GST/ HST, and discusses the experience with BVT-like taxes in several countries. It is a part of the IMFG Papers series on municipal finance and governance.

IMFG Paper No. 18 can be accessed here.