While the recent referendum defeat of the harmonized sales tax (HST) is a blow to B.C.’s competitiveness, all is not lost. Premier Christy Clark and her colleagues can make changes to the PST system and reduce other taxes that will mitigate the unrealized economic gains that the HST would have encouraged.
The HST’s greatest benefit is that it exempts all inputs used to create products and services. A return to the PST will again mean that items bought by businesses to produce those goods and services will be subject to sales tax. This will increase the cost for businesses of investing in machinery, equipment and new technologies, which makes it more expensive for B.C. businesses to expand, upgrade and innovate.
In a world where provinces (and countries) compete for investment dollars, restoring the PST will negatively affect B.C.’s investment climate, making it a less attractive place for investors to set up or expand. This is especially true since other provinces like Ontario are maintaining their harmonized sales tax and reducing other taxes on investment. In addition, our closest Canadian competitor for investment, Alberta, does not have a sales tax to apply to business inputs.
Without additional tax changes, B.C. will be left behind and risks losing much-needed investment that will instead gravitate to jurisdictions with more competitive tax policies.
Consider the impact of restoring the PST on the overall tax rate imposed on new business investment. Moving from the HST to PST will increase the overall tax rate to over 27% from 20% and result in B.C. having one of the highest overall tax rates on investment among the provinces.
To mitigate the damaging impact of restoring the PST, several options are available.
For starters, the B.C. government could improve the PST system by introducing a complete sales tax exemption on machinery, equipment and technology for all businesses. This option is not ideal because not all business inputs would be exempt, but it would significantly improve the incentives for businesses to invest in things that make B.C. workers more productive.
Another option is to eliminate B.C.’s corporate income tax. Currently, B.C.’s general corporate income tax rate is 10%, the same as that in Alberta and New Brunswick (Ontario’s rate will fall to 10% by 2013). Abolishing the corporate income tax would increase the after-tax return to investment and, as a result, dramatically improve the incentives for businesses to develop and expand.
In fact, according to SFU professor Jonathan Kesselman, eliminating B.C.’s corporate income tax would essentially offset the impact of restoring the PST on B.C.’s overall tax rate on new business investment. Abolishing the corporate income tax would also provide B.C. with a unique tax advantage within Canada, and the province would join a handful of U.S. states that don’t have a corporate income tax (i.e., Nevada, Texas and Wyoming).
While some may be skeptical about affordability, consider that the provincial government was willing to reduce the HST to 10% from 12%. Returning to a 7% PST will bring in significantly more revenue than the province would have earned with a 10% HST — to the tune of about $1.4 billion. That is nearly the same amount a 10% corporate income tax would have brought in. In other words, eliminating the corporate income tax is perfectly obtainable in the current fiscal framework.
The HST’s defeat strikes a blow to B.C.’s competitiveness, but Premier Clark has options to mitigate the damage. Hopefully, her government will show leadership and courage to create a new tax plan that ensures a brighter economic future for the province.