Harrison Ruess: Why is the government attacking Canada’s aviation and aerospace jobs?

Killing blue-collar jobs to spite the rich should be bad politics.

By: Harrison Ruess

Politicians talk out of both sides of their mouths. We know this. But one of the most amazing cases in Canada of late must be this: the new “luxury” tax on aircraft sales. The impact of this supposed tax-the-rich scheme is currently being studied by the Finance Committee.

If this isn’t a topic you’re immediately familiar with, 1) shame! And 2) in broad strokes Ottawa introduced a new tax on the sale of aircraft built in Canada, or imported into Canada, where said aircraft is valued at more than $100,000 (so basically all new aircraft).

It applies to aircraft, including airplanes, gliders, and helicopters, built after 2018. There are some exclusions, such as large commercial aircraft or aircraft used nearly exclusively for business. The tax applied is the lesser of either 10 per cent of the sale price, or 20 per cent of the amount that’s over $100,000. This is (of course!) on top of other sales taxes and licencing and registration fees. The fact that this proposal would be both utterly self-defeating, and ultimately cost the country both jobs and tax revenue is, I’m sure, hardly a factor. It’s a policy the Liberals campaigned on as a way to stick it to the rich ensure everyone “pays their fair share”.

There are also similar new “luxury” taxes on certain cars and boats, though I am focussing on the economics and discussion as it relates to aircraft. That said, many similar arguments that I’m about to offer apply to these items as well.

This is a policy that undoubtedly originated from optics arm of the political brain trust. For a politician to be seen campaigning against those darn Richie-Riches who are involved in buying/selling aircraft is fairly easy to understand. “Let’s be seen taking a run at those dastardly one per centers!” isn’t a tough sell at the campaign strategy meeting.

Indeed, the government has said as much: “Canadians twice re-elected our government on a platform that included a luxury tax on yachts, private jets and luxury cars. … It is only right and fair that the very wealthiest are asked to pay their fair share,” said the Finance Minister’s spokesperson to The Globe And Mail in December.

Alas, politics should also be about implementing policy that actually, you know, works.

Canada has a rather long history of support for our aviation and aerospace sectors from all sides of the political aisle. Some even argue that that Canada doesn’t do enough to financially support domestic aerospace, in comparison to the funding levels in competing jurisdictions like the US or UK. In any case, there is a remarkably broad consensus among Canadians that aerospace manufacturing and servicing jobs are highly desirable. They’re well-paying, advanced, globally oriented, and Canadians have a long and proud history in aviation and aerospace.

The current government clearly agrees and has done its bit to fund aerospace too. Heck, Transport Canada even has ALL CAPS talking points for the Transport Minister: “GOVERNMENT FINANCIAL SUPPORT FOR THE AIR SECTOR.” This is a government that champions the importance of aviation and aerospace.

Yet, as all of this is being said and done, we have the new luxury tax. Which, it must be highlighted, will collect very little money — to the tune of about $9 million in 2023-24, and increasing to a whopping $11 million by 2026-27, according to the Parliamentary Budget Officer. This works out to about 0.002 per cent of the $462 billion federal budget. It’s a rounding error on a rounding error.

What it will cost are jobs. AIAC’s study of the projected real-world economic impact of the luxury tax is noteworthy as it will have a significant impact on aircraft sales, leading to at least 2,000 direct jobs lost. That adds up to $149 million in lost salaries which will cost the government nearly $30 million in lost income tax revenues.

Got that? To collect roughly $10 million of tax revenue from the dastardly rich, the government is going to snuff out 2,000 direct blue-collar manufacturing jobs and cost itself nearly $30 million in income tax for good measure. It’s going to lose $20 million a year! And this doesn’t even count for indirect job losses further down the supply chain.

Trying to spite the rich, it would seem, is not an especially effective way to develop government policy.

(In fairness the government also studied this, and also projected lob losses as a result of the tax, however precisely how many jobs the tax will kill is open to some debate.)

None of this is actually surprising. As history tends to do, we’re repeating the experience the U.S. had in the early 90s. In 1991 the U.S. introduced a luxury tax on, among other things – you guessed it – aircraft. The experience south of the border is identical to what I’ve just described here. Quoting a couple paragraphs from a piece from The Washington Post from July 1993, but could have been written yesterday:

Beech (a leading U.S. aircraft manufacturer) in 1991 surveyed its dealers and asked them to cite specific deals that were blown because the potential buyer didn't want to pay the luxury tax. The answer: sales of 80 planes, costing $130 million.

Beech then calculated that these lost sales amounted to 480 lost plane-building jobs, worth $4 million in lost federal taxes. By contrast, between Jan. 1, 1991, and June 30, 1992, the Internal Revenue Service collected just $158,000 in luxury taxes from airplane sales -- enough to run the Agriculture Department for 15 minutes.

Since planes that cost less than $250,000 and planes that were used 80 percent of the time for business (mainly jets) were exempt, the primary target of the tax -- wittingly or not -- was twin-engine propeller planes, like Beech's King Air. But for the first 18 months the tax was in effect, the IRS collected not a dime from the sale of a King Air, and Beech lost 34 King Air sales totaling at least $80 million.

This was not what the advocates of the luxury tax had in mind; they innocently wanted to get the rich to pay their "fair share."

The luxury tax was repealed in the U.S. not long after and hasn’t been revisited since.

To come full circle on the collision between image and policy, this is clearly an example of optics leading policy reality. On one hand we have numerous government policies (and politicians) working to support and advance Canada’s aviation and aerospace sectors. On the other, we now have a destructive, optics-based policy that is working against the goals of its own government.

It’s high time to see beyond the optics and protect actual Canadian jobs.

Harrison Ruess is the Senior Account Director at spark*advocacy in Ottawa. Harrison is a pilot but has no personal stake in aircraft sales or purchases.

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