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HST's defeat a blow to investors

Appeared in the Vancouver Sun
Authors:
Release Date: August 30, 2011
With Labour Day just around the corner and British Columbia's unemployment rate at 7.3 per cent, Premier Christy Clark's promise of a "jobs agenda" is welcome news. Unfortunately, her actions haven't backed up her words.

Clark's first policy change after assuming office was a job-killing 30 per cent increase in B.C.'s minimum wage. Shortly after, her government proposed another dubious job creation initiative by pledging $40 million in aid to Vancouver Shipyards. This approach of picking businesses and industries to receive taxpayer support has repeatedly failed around the world to spur investment, economic growth and jobs.

If Clark truly wants to make our province a job creation machine, she should focus on making B.C. the most investment-friendly jurisdiction in Canada. Encouraging all businesses to invest and develop operations is the way to make B.C. a leader in private sector job creation.

Here's what's needed:

To attract more business investment and gain a competitive advantage over other provinces, Clark should reform B.C.'s labour laws. Specifically, B.C. should adopt "worker choice" laws, which allow workers to choose whether they want to join and financially support a union. Currently, workers can be forced to become union members and contribute union dues as a condition of employment.

Evidence from the 22 U.S. states with worker-choice laws shows that these states have higher rates of labour force participation, lower unemployment rates, higher rates of economic growth and greater investment - that's after controlling for a number of other factors (like a state's tax burden).

Reducing red tape also should be a priority. B.C. suffers from too much government regulation, which decreases innovation, delays product development and adoption, and stifles entrepreneurship.

One area of red tape that threatens B.C.'s investment climate is recent environmental regulation, whether already implemented (i.e. carbon tax, low carbon fuel standards, and new green building requirements) or still in the draft stage (i.e. cap-and-trade system).

Consider the proposed cap-andtrade system. The increased costs will likely fall on B.C. workers as investments in plants, machinery, equipment and new technologies are reduced. This is especially true in energy intensive industries such as manufacturing, utilities, forestry, oil and gas, mining and transportation.

To avoid losing investment to jurisdictions with more competitive tax policies, additional tax reductions also are needed.

While B.C. has improved its tax system over the past decade, the HST's defeat will strike a blow to the province's investment climate.

To mitigate the damaging impact of restoring the PST, B.C. should aggressively lower corporate income taxes. Doing so increases the after-tax return to investment and, as a result, dramatically improves the incentives for businesses to develop and expand.

In addition, B.C. should consider a complete sales tax exemption on machinery, equipment and technology purchased by businesses. A partial exemption was put in place in 2001, but the province limited the exemption by narrowly interpreting the types of machinery and equipment and manufacturing companies that qualified.

B.C. also should remove the tax barrier to small business growth. Currently, B.C. businesses pay 2.5 per cent tax on the first $500,000 of income and thereafter pay the general corporate income tax rate (currently at 10 per cent). Such a steep increase in tax rates creates a powerful barrier or disincentive for growth and expansion. To help reduce the tax barrier, the government could double the threshold to $1 million.

Finally, B.C. should institute a single flat tax rate on personal income (like Alberta). This will help attract and retain professional and skilled workers, and encourage investment and entrepreneurship.

Of course, tax relief will be difficult with government deficits totalling $1.2 billion over the next three years and with the costs of transitioning back to PST/GST looming. The reality is that Clark has little budget room for tax relief unless government spending is reigned in.

Skyrocketing health care expenditures, in particular, must be brought under control as health care spending continues to consume a larger portion of government resources. By 2013-14, health care will account for nearly 46 per cent of the government's program spending, up from 37 per cent in 2001.

Clark can ease the burden of spending restraint by reforming the way government services are delivered. For example, money could actually be saved on health care without negatively impacting quality or universal accessibility by implementing policies that are common in Europe and elsewhere.

While Clark is right to focus her energies on job creation, she needs to stay away from dubious job creation initiatives. The way to make B.C. a job creating machine is to make it the most investment-friendly province.


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