British Columbians need action, not more study, to address problems with provincial tax system

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Appeared in the Vancouver Sun, July 22, 2016

They say the first step to finding a solution is to identify the problem. And B.C.’s tax system represents a real problem for the province. Without more competitive tax policies, B.C. risks losing entrepreneurs and investment that may gravitate elsewhere. Inaction ultimately means fewer opportunities and less prosperity for British Columbians.

Thankfully, the B.C. government seems to recognize we have a problem, recently establishing a commission to generate ideas on how to make the provincial tax system more competitive. While the creation of the panel is a positive development, there’s no guarantee the commission will spark any action. After all, the recommendations by the government’s previous expert panel on taxation were largely ignored.

If the B.C. government truly wants to make the provincial tax system more competitive, reform is needed across three key taxes: the provincial sales tax, the corporate income tax, and the personal income tax.

Let’s start with the PST. Moving back to the PST from the unpopular HST was an economically damaging tax change since the PST taxes business inputs (machines, equipment, materials, energy and other items) used by entrepreneurs to produce and sell their goods and services, effectively raising the cost of investment in the province. In contrast, almost all of B.C.’s competitors have moved to a value-added sales tax such as the abolished HST, which exempts business inputs from sales taxes.

Addressing this problem is critical for B.C.’s economic prospects, as the province continues to have one of the highest overall tax rates on new investment in Canada and the developed world.

Understandably, the government is likely unwilling to bring back the politically hot HST—in fact, the commission’s terms of reference rule it out. But a second best alternative is to reform the PST in a way that exempts all business inputs from sales taxes.

A move in this direction would resurrect a key recommendation from the old expert panel: introduce a refundable investment tax credit equal to the PST paid on machinery, equipment and technology (such as computer software).

Another damaging tax hike in recent years is the increase to the corporate income tax rate from 10 to 11 per cent. Research by noted tax economist Bev Dahlby—who incidentally will chair the commission—finds that the corporate tax is among the most economically detrimental forms of taxation in terms of its effect on incomes and prosperity. Despite the rhetoric about “corporations” paying for corporate tax hikes, it’s ultimately people who pay, with workers footing part of the bill through lower wages.

Returning the rate to 10 per cent, or dropping it further, would give B.C. a marked advantage relative to the other provinces.

Finally, we cannot forget about personal income taxes. Lower personal tax rates encourage individuals to work hard, expand their skills, invest and engage in entrepreneurial activities—all activities that help spur prosperity in the province. Moreover, evidence shows that competitive rates help attract and retain highly-skilled workers such as doctors, lawyers, entrepreneurs, business professionals, engineers and scientists.

We commend the government for following through on its commitment to eliminate the temporary top tax rate enacted in 2014. However, this year, the federal government enacted its own new and higher top personal income tax rate, more than wiping out the provincial rate reduction. B.C.’s combined federal-provincial top rate is now 47.7 per cent and higher than the combined rate in most U.S. states including next-door Washington (39.5 per cent), which has no state income tax.

Bottom line: the government has acknowledged the problems with the provincial tax system. But that’s only step one. Ultimately, British Columbians need action—not just more study.

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