Economic research indicates that tax rates affect people’s behaviour, with higher taxes contributing to lower rates of economic growth, personal income growth, capital formation, and entrepreneurship. Research on taxation also finds that different taxes impose different costs on the economy. Specifically, production or capital-based taxes impose much higher costs on an economy than do less costly taxes such as consumption taxes. Unlike the consumption-based Harmonized Sales Tax (HST), the Provincial Sales Tax (PST) is partly a consumption tax and partly a tax on production. Restoring the PST has therefore increased the cost of investing in British Columbia and undermined the province’s economic competitiveness.

Primarily due to the re-implementation of the PST, BC’s tax system poses a challenge for the province in terms of attracting investment and facilitating economic growth. Without a more competitive system, BC risks losing entrepreneurs and investment that may gravitate elsewhere. Inaction ultimately means fewer opportunities and less prosperity for British Columbians.

This submission examines BC’s performance relative to other provinces in three key areas of taxation (business taxes, property taxes, and personal income taxes) and provides reform options for each area.

To mitigate the negative effect on the provincial investment climate of restoring the PST, BC could:

• Introduce a complete sales tax exemption on all business inputs including machinery and equipment. Because sales taxes on capital goods are economically damaging taxes, this is a high priority reform option.
• Reduce the general corporate income tax rate to 8% from its current 11% rate, encouraging business investment and giving BC a marked advantage over other provinces.

Another important business tax reform is to reduce the disincentive for small businesses to grow. A less ideal but still practical option is to increase the threshold of income eligible for the preferential small business tax rate of 2.5% from $500,000 to $1 million.

When it comes to property taxes, BC appears to have a serious problem in its treatment of certain business classes as municipalities subsidize low residential rates with relatively high rates on business property. Two options could rectify this problem:

• Equalize property tax rates across business classes.
• Determine ranges of fairness and thresholds based on average property tax rates in municipalities for different major classes and require all tax rate changes to move toward this range.

To attract and retain highly skilled workers, BC could make the province’s middle and top marginal income tax rates more competitive. Specifically, BC could gradually collapse its top three marginal rates (14.7%, 12.3%, and 10.5%) with the ultimate goal of moving toward a single tax rate on personal income.