Last month, the Fraser Institute was invited to make a submission to British Columbia’s Commission on Tax Competiveness (our complete submission is available here). The commission is doing important work, gathering and generating ideas on how to make B.C.’s tax system more competitive for investment and entrepreneurship, and we are grateful for the opportunity to contribute to that process.

A lot is at stake. If the provincial government fails to take corrective action, that would mean fewer opportunities and less prosperity for British Columbians. Our highest priority policy option is to fix the problems emanating from the Provincial Sales Tax (PST).

B.C.’s tax competitiveness took a major hit when it moved back to the PST from the unpopular HST. This was an economically damaging tax change since the PST taxes the production process, imposing a sales tax on business inputs (machines, equipment, materials, energy and other items) used by entrepreneurs to produce and sell their goods and services. This raises the cost of investment in the province. In contrast, many 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 now has one of the highest overall tax rates on new investment in Canada and the developed world.

Although there are several ways B.C. can improve its tax system, the most important is to reform the PST. Understandably, the government is 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 be to resurrect the recommendation from the government’s 2012 Expert Panel on Business Tax Competiveness and introduce a refundable investment tax credit equal to the PST paid on machinery, equipment and technology (such as computer software).

The commission is scheduled to present its final report later this year. Hopefully it will offer a solid roadmap for improving the competitiveness of B.C.’s tax system. And hopefully the government listens.