By Charles Lammam
and Milagros Palacios
The Fraser Institute
When touting the tax cuts in B.C.’s 2017 budget this week, Finance Minister Michael de Jong said the cuts will leave money “in the pockets of British Columbians to let them make the choices that are important to them.” That’s true, but the government missed an opportunity to cut other taxes that would have better laid the foundation for a more competitive and pro-growth economy.
The budget’s most significant tax cut is the proposed reduction in Medical Service Plan (MSP) premiums, which will provide relief to individuals and businesses (in the short term) that pay MSP premiums on behalf of their employees. Other proposed tax cuts include a reduction to the small business tax rate, an exemption of electricity purchases from PST, and a series of tax credits targeted at particular individuals and companies.
Once fully implemented, the proposed tax cuts will amount to $1.3 billion. Partly as a result of these measures, the budget projects that the B.C. government’s tax take as a share of the provincial economy will decrease from 19.4 percent in 2016/17 to 17.7 percent by 2019/20.
In light of this decrease, it’s important to understand that some taxes impose greater economic harm (reduced economic growth and prosperity) than others. So it doesn’t only matter how much taxes are cut, it also matters which taxes are cut. Again, the government could have gotten greater economic bang for its tax cuts by cutting other taxes.
For example, with the $1.3 billion, the government could have significantly reduced personal income tax rates. Broad-based cuts to personal tax rates encourage people to increase their work effort, expand their skills, save and invest, and engage in entrepreneurial activities – all things that propel the economy forward. And evidence shows that more competitive tax rates can help a jurisdiction attract and retain highly-skilled and educated workers such as entrepreneurs, business professionals, engineers and scientists.
One specific option is to eliminate the top two marginal tax rates in the province’s personal income tax system (12.3 and 14.7 percent) and raise threshold at which the 10.5 percent rate applies to $100,000. This would have simplified the tax system, reducing the number of tax brackets from five to three, and have made the new top income tax rate much more competitive. Such a plan represents a $1.3 billion tax cut.
Another option is to further exempt business inputs from PST, as was recommended by the government’s commission on tax competitiveness. Exempting business inputs helps spur investment—a key driver of productivity and economic growth – by reducing the overall tax rate on investment in B.C., which remains one of the highest in Canada and the developed world.
The budget did commit to exempting electricity purchases from PST, and this is a good start, but much more must be done to significantly reduce B.C.’s business tax disadvantage, as many jurisdictions do not impose a sales tax on business inputs. A more pro-growth tax cut would have used the $1.3 billion to exempt additional business inputs from PST including machinery, equipment and technology.
A final alternative option is to use the $1.3 billion to cut the general corporate tax rate by half—from 11 percent to 5.5 percent. A corporate tax cut of this magnitude would provide significant benefits to all British Columbians including increased investment, higher wages for average workers (through increased productivity), and a boost to economic growth.
While the tax cuts proposed in the budget may be welcomed by B.C. taxpayers, unfortunately the government missed an opportunity to cut other taxes that would have done more to foster economic growth and increased prosperity.
Charles Lammam is director of fiscal studies, Hugh MacIntyre is a policy analyst, and Milagros Palacios is a senior economist at the Fraser Institute.