By Charles Lammam
The Fraser Institute
The fact that the first full budget from B.C.’s new government includes major tax increases will likely go unnoticed by many – unfortunately.
Instead, many economic commentators will focus on the government’s aim to balance the operating budget every year. A fiscal framework that avoids the deficit-financed spending that plagued the NDP in the 1990s is a good thing. But, in reality, the $5.4 billion in new spending over the next three years will be financed by a series of new tax increases (on housing, payrolls and carbon).
And clearly, the budget fails to address a major issue: the economic headwinds from the United States.
For nearly a generation, business investment in B.C. has been anemic, with the province falling behind the rest of Canada. For example, from 2014 to 2016 (the latest year of available data), non-residential business investment declined 19 per cent after accounting for inflation.
Moreover, the level of investment per worker in B.C. is 19 per cent lower than the national average. This means there’s less capital available to workers, including machines, equipment and technology. That’s a critical problem for B.C. given that investment remains a crucial driver of economic growth and overall prosperity.
A major impediment to business investment in B.C. is the uncompetitive nature of its business taxes, driven in part by the provincial sales tax. The overall tax rate on new investment in B.C. is 27.9 per cent, one of the highest rates in the industrialized world. And this is before the new provincial government made the system even less competitive by raising the general corporate tax rate from 11 per cent to 12 per cent.
And recent developments in the United States may make this problem worse.
As a result of sweeping reforms, the U.S. business tax regime has become dramatically more competitive. According to University of Calgary economist Jack Mintz, the overall tax rate on new investment has nearly halved to 18.6 per cent – approximately 10 points lower than B.C.’s rate.
The province’s challenges in attracting business investment will intensify given U.S. tax reform. And it’s not like the B.C. government can claim it wasn’t warned. U.S. tax reform has been in the works for some time now.
Unfortunately, the budget does nothing to respond.
In fact, it enacts a new employer-based payroll health tax (up to a 1.95 per cent rate on total payroll costs) to replace revenues from the Medical Service Plan, which will come on top of a Canada Pension Plan payroll tax increase to be phased in starting next year.
In addition, where the U.S. federal government has eschewed carbon pricing in all forms, the B.C. government is moving ahead with marked increases to the provincial carbon tax, reaching $50 a tonne by 2021. Increased payroll and carbon taxes will hamper investment.
U.S. federal tax reform has also hurt B.C.’s personal income tax competitiveness. Earlier this year, the B.C. government raised the top personal income tax rate from 14.7 per cent to 16.8 per cent. Combined with the new and higher top federal rate of 33 per cent, high-skilled workers in B.C. are now taxed at a marginal rate of nearly 50 per cent.
This is an uncompetitive rate, particularly relative to Washington State. It has no state-level income tax, so the new federal top tax rate was lowered from 39.6 per cent to 37 per cent. Significant tax rate differentials will make it harder for B.C. to attract and retain the high-skilled workers and entrepreneurs necessary for a vibrant economy.
And finally, the U.S. government is creating challenges for B.C. on the trade front. Access to the U.S. market is important for the province and Canada in general, but North American Free Trade Agreement renegotiations have made the extent of that access uncertain.
In B.C., there’s the added issue of proposed new tariffs on softwood lumber. This uncertainty aggravates an already inhospitable investment climate.
B.C.’s 2018 budget does little to improve the investment climate and mitigate the effects of these challenges. A balanced budget is a good thing but it’s not enough to secure prosperity for British Columbians.
Charles Lammam is director of fiscal studies and Hugh MacIntyre is senior policy analyst at the Fraser Institute.
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