Reducing BC's Business Taxes: The Next Step Towards Economic Recovery

The announcement means that by January 1 of 2002, BC will have the lowest personal income tax rates for low-income households and the second lowest top marginal tax rate in the country. Last week's announcement will yield positive returns for the province both in the short- and longer term, contributing to the province's economic recovery.

However, the reduction in personal income taxes should be seen as one step in the larger process of tax relief and tax reform, as opposed to a final destination. There is still work to be done on a number of fronts. In particular, the new government must move quickly to reduce and reform business taxes if it is to move the BC economy forward and recapture our traditional position of economic prominence.

As argued in a recent Fraser Institute study, Returning British Columbia to Prosperity. British Columbia's business taxes are getting more and more uncompetitive. There are a number of business taxes that require immediate attention, including corporate income tax rates, corporate capital taxes, and the structure of the provincial sales tax.

British Columbia's current corporate income tax rate is 16.5 percent. Alberta and Ontario have both announced that their corporate income tax rates will be reduced to 8.0 percent by 2005 and 2006, respectively. In other words, within five years BC's corporate income tax rate will be more than double the rates in Alberta and Ontario. This is not a tenable situation for BC. Equally as important as competitiveness, reducing corporate income taxes will spur investment, one of the keys to returning British Columbia to prosperity.

Another area of concern is the corporate capital tax (CCT). This tax is levied as a percentage of paid-up capital and is profit-insensitive. That is, the CCT is assessed on companies regardless of whether or not they're making money and is based on the amount of investment in the firm. In fact, depending on the province, it can often include debt as well as equity. If that weren't bad enough, almost none of Canada's trading partners, with the exception of Japan and Germany, maintain a capital tax.

British Columbia's capital taxes are essentially the same as in Ontario (Ontario's rates for financial institutions are slightly lower). Alberta, on the other hand, has completely eliminated capital taxes. All of the other provinces (except for Alberta) maintain some form of capital taxes for either corporations generally or financial institutions specifically. The combination of the deleterious nature of the tax with the fact that few of our trading partners have a similar tax results in a powerful argument for its complete elimination.

A final area of business tax folly is the provincial sales tax. Currently, the PST applies to business inputs the things businesses purchase in order to manufacture their goods or supply their services. They include equipment, vehicles, computers, energy, and legal and consulting services.

About two-fifths of the total amount of revenue collected from the PST is derived from the taxation of these business inputs. It makes little sense to tax inputs since the objective of sales or consumption taxes is obviously to tax consumption, not production.

The taxing of business inputs is a serious disadvantage for BC businesses since Alberta maintains no provincial sales tax, and Quebec and the Maritime provinces have all integrated their provincial sales taxes with the federal GST, which does not tax business inputs. The easiest way to fix this is to integrate British Columbia's sales tax with the federal GST. This, unfortunately, would probably be too politically difficult. The alternative is to replicate the GST's exclusion of business input purchases from the sales tax base. Either move would further boost business investment and competitiveness in British Columbia.

BC's new government must continue on with its bold agenda for tax relief by moving to reduce corporate income taxes, eliminate the corporate capital tax, and reform the provincial sales tax. Such changes will buttress the bold move made last week with respect to personal income taxes and further the cause of returning BC to prosperity. Then the government can get on to reforming the way it delivers programs and deregulation but that's another story.