Burger King is in talks to buy a Canadian coffee and donut chain. While this is an interesting development for a number of reasons including the $18 billion entity that would be formed by a merger, what struck me in particular was that Burger King is planning to relocate its headquarters to Ontario, Canada, as part of the deal.
The relocation of a major corporation is not a decision entered into lightly, but Burger King has several million reasons to relocate thanks to Canada’s 15 percent national corporate tax rate instituted by the conservative Canadian government. Even combined with Ontario’s 11.5 percent provincial corporate tax rate, the company will still save millions by relocating from the U.S. and our 35 percent federal corporate tax rate.
Burger King is not the only one either. In 2010, Valeant Pharmaceuticals International Inc. merged with Canada’s Biovail Corp. and chose to relocate to Canada. Despite dire predictions that cutting the corporate tax rate would result in a loss of government revenue, the net result of the shift is likely to be an increase in revenue as additional corporations take advantage of the opportunity for what’s called a “tax inversion.”
This tendency was explained a number of years ago by economist Art Laffer, whose “Laffer curve” shows that higher tax rates can result in lower tax revenue. The basic premise is quite simple: If the tax rate were 100 percent, you would not bother trying to produce anything because you wouldn’t get to keep any of it. At 99 percent, your incentive to produce would still be almost nonexistent. As the tax rate decreases, however, your incentive to produce increases, and this results in greater revenue for the tax-collecting entity.
Likewise, now that Canada has lowered its corporate income tax, the incentive to relocate to Canada (and pay taxes to Canada) has increased.
What can Idaho learn from this situation? Idaho’s “State Business Tax Climate Index” rating is No. 18, according to the Tax Foundation. While this may not seem too bad, it is worse than all six states with which Idaho shares a border. That includes Wyoming at No. 1 and Nevada at No. 3. Just like Burger King is picking Canada over the U.S. based on a more favorable tax structure, so businesses in the Mountain West and Pacific Northwest are choosing to locate in states other than Idaho.
Opponents of reducing taxes fail to grasp the reality of the situation. High taxes stifle innovation and entrepreneurship and result in lower tax revenue than a business-friendly tax climate with low taxes and few regulations. Idahoans are losing out on the potential for job growth and economic advancement due to a poor business tax climate. Unless we want to see more businesses leave (and even fewer show up), Idaho needs to reduce its tax burden.