With everything the pandemic has thrown at the automotive industry, what is needed most now is the opportunity to recover.
They say spring brings new life; it is the season of hope. It brings transformation and change — from darkness to light, from cold to warmth, from grey to bursts of colour. It’s a period of house cleaning and preparing the garden.
In Ottawa’s political bubble, spring is also a buzzing period. It’s budget season, a time when the federal government presents its goals and aspirations for the year to come.
Such an occasion occurred in April, Chrystia Freeland, the first female Canadian finance minister, unveiled the Liberal government’s first budget in more than two years, during a time when COVID-19 cases are re-escalating across the country.
This much-anticipated budget was one of the most important in recent history, as many sectors of the economy are still reeling from the ravaging impacts of COVID-19, and provinces are navigating through new lockdowns and a shaky national vaccine roll-out.
The 700-pages document, which could double as a re-election pitch for the Liberals, provided the government’s roadmap to Canada’s economic recovery post-crisis, along with a plan to “build back better.”
Themes of support for the hardest-hit sectors, investment in green energy, and support for those who have been disproportionately impacted by COVID-19 ( including women, Indigenous peoples, young people, and racialized Canadians) were recurring through this budget.
The automotive industry was hit hard by COVID-19, vehicle sales were down by record levels, and the current global chip shortage creates strong headwinds to the recovery of the sector. Now is not the time for any new taxes.
The government widely attempted to balance the need of providing an ongoing rescue plan for a pandemic-damaged economy with setting the stage for a stronger economic rebound.
Essential programs such as the wage subsidy program and the rent subsidy program were extended to the fall. However, they are scheduled to ramp down in the coming months, indicating the government’s desire to wean businesses off these support programs as the economy recovers. The budget also included a massive $100 billion stimulus spending over the next couple of years, including a plan for a national early learning and child care program.
That said, as the popular adage goes: “there is no such thing as a free lunch,” and the budget proposed a number of measures aimed at adding revenues to the federal coffers following a year of stratospheric levels of public spending.
While the budget does not propose a national “wealth tax” sought by the NDP, the budget was an overall “Robin Hood” theme — greater spending on social programs like childcare, while taxing “luxury” items such as airplanes, boats, cars, and web giants.
As you can recall, the luxury tax was part of the Liberal election platform in 2019. The promise was delayed over the past couple of years, in part due to the immense pushback from CADA, the whole industry, and European countries.
The overwhelming majority of luxury vehicles sold across Canada are European-made. The government recently signed a free trade agreement with the European Union; therefore, the new levy may be considered as a non-tariff trade barrier and contrary to the spirit of the agreement.
Beyond the economic argument that luxury levies do not work and are inefficient, as it has been demonstrated in many other jurisdictions, including the U.S, the timing of the tax is highly questionable.
The automotive industry was hit hard by COVID-19, vehicle sales were down by record levels, and the current global chip shortage creates strong headwinds to the recovery of the sector. Now is not the time for any new taxes. Particularly, an arbitrary and proven inefficient taxation scheme such as a luxury tax.
The government should instead focus on recovery and take the steps to ensure the economy roars back post-crisis. Strong economic growth post-pandemic will support revenue generation for the government. Businesses need an economic environment where they can prosper and remain competitive, not disruptive policies that will hinder their growth.
On the bright side, budget 2021 proposed to implement the new tax next year, through separate legislation that would be introduced in the fall. This provides an opportunity to shape the details in the legislation and minimize the impact on the industry.
While “Robin Hood” policies such as luxury taxes are morally appealing to make the wealthiest among us pay their fair share and generate additional revenues, the reality is that they do not work. They are punitive, economically inefficient, and tend to disproportionately affect the industries targeted.
Plus, in Canada, luxury goods are already taxed proportionally to their retail value, ensuring that the super-wealthy pay more when they purchase expensive cars.
If the ultimate goal of Ottawa is the efficient generation of revenues and the reduction of income inequality, there are better ways to achieve that through economic growth, job creation, and an efficient structure for tax and administration at all levels of government. Putting this burden on Canadian businesses will simply not cut it.
