B.C.’s 2018 budget fails to deal with competitiveness
Unfortunately one of the most important takeaways of the new B.C. government’s first full budget will likely go unnoticed—it includes major tax increases to finance major spending increases.
Many economic commentators will likely instead focus on the government’s aim to balance the operating budget every year. While a fiscal framework that avoids the deficit-financed spending that plagued the NDP in the 1990s is a good thing, 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 the elephant in the room—the economic headwinds from the United States.
Here’s the backdrop. 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. This is 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 its uncompetitive business taxes, driven in part by the PST. 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 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 tax 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.
Indeed, the province’s pre-existing challenges of attracting business investment will intensify given tax reform south of the border. 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 MSP, which will come on top of a CPP 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 put another nail in the coffin of B.C’s personal income tax competiveness. 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, which has no state-level income tax and where 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. federal 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 NAFTA renegotiations have made the extent of that access uncertain. In B.C. there’s the added issue of new tariffs on softwood lumber, which has yet to be resolved. This uncertainty aggravates an already inhospitable investment climate.
In the face of these challenges, B.C.’s 2018 budget does little to improve the investment climate and mitigate their effects. A balanced budget is a good thing, but insufficient to secure the prosperity of British Columbians.
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