Government should consider tax exemption on capital inputs
Troy Media – by Charles Lammam and Milagros Palacios
When the Provincial Sales Tax (PST) rears its ugly head on April 1, 2013, British Columbia’s tax competitiveness will be dealt a major blow as the cost of investing in the province increases dramatically. Unfortunately, the well-being of B.C. families will be negatively affected in many ways – none more important than the adverse impact the PST will have on investment in machinery, equipment, and technology – the backbone of a healthy economy.
Thankfully all is not lost, as the provincial government seems to understand the magnitude of the problem. That’s why, earlier this year, B.C. Finance Minister Kevin Falcon appointed an Expert Panel on Business Taxation to provide recommendations on how to improve B.C.’s business tax competitiveness in light of the PST’s rebirth.
While the Expert Panel is a good first step, only concrete tax changes will provide a true test of the government’s commitment to B.C.’s economic competitiveness.
To understand the need for tax reform, it is important to understand why returning to the PST is so economically damaging.
Currently under the HST, businesses and entrepreneurs do not pay sales tax on the inputs used in the production process. The exemption is especially important for capital inputs like machinery, equipment, and technology – investments that make us more productive and lead to higher wages.
Once the PST is restored, business inputs will again be subject to sales tax and the cost of investing in the province will increase significantly. B.C. will go from having an overall tax rate on investment that is in line with the Canadian average to one of the highest rates in Canada, putting us at a distinct disadvantage compared to key provincial competitors like Alberta, Saskatchewan, and even Ontario.
B.C. is competing with these provinces and other jurisdictions for investment dollars, so it falls on the government to ease the damaging impact. Several options are available.
Most importantly, the government should consider a sales tax exemption on capital inputs (machinery, equipment, and technology). Something similar was attempted back in 2001 but the province limited the exemption by narrowly interpreting the types of machinery and equipment and companies that qualified. Indeed, the exemption was not available to most businesses and resulted in an administrative disaster which eventually deterred many companies from seeking eligibility.
Another option is to gradually reduce the general corporate income tax rate to eight per cent from the current 10 per cent rate. This would provide B.C. with a marked advantage over all other provinces, giving it the lowest rate within Canada and encouraging additional business investment.
Property taxes shape the province’s competitiveness but many municipalities in B.C. subsidize low residential rates with relatively high rates on commercial property. To address discriminatory property taxation, the provincial government should considering equalizing property tax rates across different types of businesses and setting a range of fairness for the ratio of business
to residential rates.
While the Expert Panel’s focus is on business taxation, personal income taxes are also an important component of B.C.’s overall investment climate. Competitive personal income tax rates enable the province to better retain and attract high-skilled professionals as well as promote entrepreneurship and innovation in B.C.
In this regard, B.C. can make its middle and top marginal income tax rates more competitive with Alberta, our closest provincial competitor. Doing so would make our province a better place to work and encourage productive economic behaviour like entrepreneurship and risk-taking.
These and other tax reforms could be implemented within the provincial government’s balanced budget framework so they do not result in increased public debt. This could be accomplished by broadening the consumption tax base of the PST and/or by eliminating or scaling back many of the special interest driven corporate and personal income tax credits currently offered by the provincial government.
But the government should avoid increasing taxes that impose high economic costs on society, such as personal and capital-based taxes, to garner revenue for other tax reductions. It could instead wait to enact the proposed tax reforms until after the budget is balanced and revenues become available.
With the pending return of the PST, B.C. risks losing much needed investment that will instead gravitate to jurisdictions with more competitive tax policies. While we eagerly await the Expert Panel’s final report, it will ultimately fall on Premier Christy Clark and her government to show leadership and create a new tax plan that ensures a brighter economic future for the province.
Charles Lammam and Milagros Palacios are economists at the Fraser Institute. Their complete submission and recommendations to the Expert Panel are available at www.fraserinstitute.org