Tax reform needed to keep BC competitive

Last month, British Columbia’s Expert Panel on Business Taxation delivered its much anticipated final report (at least among us policy wonks). Unfortunately, the report garnered little media attention and failed to spark much debate about BC’s tax competitiveness.

The Expert Panel was appointed early this year by then-Finance Minister Kevin Falcon; it was made up of a cross-section of people from business, academia, and government to provide recommendations on how BC’s business taxes could be made more competitive given the return of the PST in 2013.

The Expert Panel was clear on two important issues in its final report.

First, BC’s tax competiveness matters: “A competitive tax system encourages businesses to locate or expand their operations in BC which, in turn, creates more jobs for British Columbians. A competitive tax system helps ensure that our standard of living keeps pace with the rest of Canada and raises more revenue to fund public services.”

And second: “The reintroduction of the PST on April 1, 2013 will impose a significant cost on BC businesses that wish to modernize their operations and preserve and create jobs in our province.”

Recall that the HST’s greatest benefit is the sales tax exemption of all inputs used by businesses to create products and services. A return to the PST will once again mean that items purchased by businesses to produce those goods and services will be subject to sales tax. The cost of investing in machinery, equipment, and new technologies will increase, making it more expensive for BC businesses to expand, upgrade, and innovate.

At minimum, there should be a complete sales tax exemption for businesses purchasing machinery, equipment, and technology when the province returns to the PST. Fortunately, the Expert Panel agrees and made its key recommendation to introduce a refundable investment tax credit equal to the PST paid on machinery and equipment, including computers and software (the Panel made a total of 38 recommendations, not all of with which we agree).

However, neither Premier Christy Clark nor Opposition leader Adrian Dix has shown any public support for the Expert Panel’s recommendation nor have they talked about the importance of mitigating the damaging impact of the return to the PST.

Rather, earlier this year Premier Clark’s government proposed a host of new tax increases in its 2012 budget including a reduction in the amount of income British Columbians can earn tax free, increased MSP premiums, reneging on an earlier promise to eliminate the small business tax rate, higher tobacco taxes, and a “provisional” one percentage point increase to the general corporate income tax rate in 2014/15.

As for Mr. Dix, he recently indicated that if elected premier, his government would significantly raise business taxes and reinstate a capital tax on financial institutions.

Thus we have tax policies proposed by both the Liberal and NDP parties that would be extremely damaging to B.C’s attractiveness for business development.

To encourage businesses to invest and expand their operations in BC, the focus should be on making BC the most investment-friendly jurisdiction in Canada. To that end, the government should put forth a tax plan to reduce the crushing blow to BC’s competitiveness in light of the PST’s rebirth.