B.C. budget delivers blow to competitiveness in the province
In British Columbia’s recent budget speech, Finance Minister Carole James (pictured above) said: “We’re competitive as a province, a destination for investors, and we’re committed to seeing that continue.” This is the right talk. Attracting investment is a critical ingredient for economic growth and prosperity more generally.
But James’ budget fails to live up to this commitment. In fact, many of the new tax policy changes will undermine B.C.’s attractiveness as a place for investment, entrepreneurship and top talent.
First consider the personal income tax changes. The budget creates a new, higher top personal income tax rate of 16.8 per cent—more than two percentage points higher than the previous top rate of 14.7 per cent—effective next year.
When combined with the top federal tax rate, which was raised recently by four points, B.C.’s top earners will pay a marginal tax rate of nearly 50 per cent, placing B.C. in the middle of the pack (fourth lowest rate out of 10 provinces) rather than a leader on personal income taxes. Moreover, B.C. will have a higher top tax rate than next-door Alberta (48 per cent) and much higher than next-door Washington, which has no state-level income tax (the top federal rate is approximately 40 per cent and kicks in at a much higher income level).
Put simply, the personal income tax rate hike will make B.C. less competitive for attracting and retaining highly-skilled workers such as entrepreneurs, business professionals, engineers and scientists, as the evidence shows higher tax rates play a role in the decision-making of high-skilled workers on where to live and work.
When investors and entrepreneurs have trouble attracting and retaining highly-skilled workers, B.C. becomes a less attractive place to do business and pursue new ventures.
The NDP budget also increases the general corporate tax rate, from 11 per cent to 12 per cent, effective next year as well. Notably, just a few years ago, in 2012, this tax rate was 10 per cent, meaning the rate has increased 20 per cent recently.
But the reason the increase is so damaging is that it exacerbates a long-standing problem in the province. B.C. has one of the highest overall tax rates on new investment in Canada and the developed world because the Provincial Sales Tax applies to business inputs (machines, equipment, materials, energy and other items) used by entrepreneurs to produce and sell goods and services. The result—the effective cost of investing in the province is relatively high.
While James’ NDP government is phasing out PST on electricity, which is a welcome policy, the increased corporate tax rate will increase the overall tax rate on new investment. This hardly matches the government’s commitment to competiveness.
Finally, this budget will undermine B.C.’s tax competitiveness through a 66 per cent increase in the carbon tax rate over the next four years. The current rate of $30 per tonne will jump to $50 per tonne by 2021.
Raising the carbon tax, especially without offsetting tax reductions elsewhere, will also increase the cost of doing business in B.C. In particular, the hike will hurt industries with high emissions intensities (cement production, petroleum refining, oil and gas extraction, manufacturing), further exacerbating competiveness concerns.
The budget could have at least mitigated the competitiveness impact of the carbon tax hike by making it revenue neutral through offsetting reductions to personal and corporate income tax rates. Instead the government raised these economically damaging taxes and officially scrapped the legislated commitment to making the carbon tax revenue neutral.
Finance Minister James is talking the right talk about the importance of ensuring B.C. is competitive for attracting investment, but her budget doesn’t walk the walk.