Does the BC business sector need a tax cut? Not so much. But Budget 2017 promises to give business over $600 million in additional annual tax breaks nonetheless.
That’s more than half a billion dollars annually that won’t be invested in creating affordable high-quality child care spaces, building affordable housing (as opposed to a one-off election year patch job) or increasing health care funding, including investing in solutions to reduce surgical wait times.
So, are BC businesses sagging under the weight of an unfairly high tax burden?
Far from it, which we emphasized to the BC government’s tax competitiveness commission last fall:
- BC has amongst the lowest business taxes in Canada – a country that has seen major provincial and federal corporate tax cuts over the past 20 years. Since 2000, the general federal corporate income tax rate has dropped from 28% to 15% while the provincial corporate income tax rate went from 16.5% to 11%. For small businesses, it is much lower.
- According to rankings by the global accounting firm KPMG, Canada is the second-lowest-cost country in which to do business among 10 major industrialized economies. And Vancouver is one of the five lowest-cost jurisdictions in which to do business among 111 global cities.
Budget 2017 promises to give business over $600 million in additional annual tax breaks.
In short, BC’s business sector is not overtaxed. If anything we could increase business taxes and stay comfortably in the middle of the pack when it comes to tax rates among our provincial and international economic “competitors”. For example, a one percentage point increase in the corporate income tax rate would add in the neighbourhood of $300 million per year in revenue.
There may well be a case for a change in the mix of taxes that business pays. Some of the individual business tax changes in Budget 2017 have merit, but there’s no justification for the government to reduce business’s overall share of tax contributions. If there’s a desire to change the business tax mix to improve efficiency or encourage investment, the business sector and government must show how it will be paid for. There should be no net decrease in public revenue because that either means: 1) foregoing critically needed public investments or 2) shifting taxes away from business and on to families.
Business tax changes in BC’s budget could have been made to follow this principle, but they weren’t.
The four main business tax breaks offered by the provincial government in Budget 2017 include:
- an exemption from the PST on industrial electricity.
- a cut to the small business corporate income tax rate.
- an extension of the scientific research and experimental development tax credit.
- the portion of the promised MSP reductions that will flow to business.
The exemption of electricity charges from the PST will cost about $164 million annually once it’s fully implemented in 2019. The exemption itself is a sensibly targeted measure that can help protect well-paying jobs in some key energy-intensive workplaces like pulpmills and in some vulnerable one-industry towns. Indeed, BC is one of the only jurisdictions in the country that charges sales tax on electricity. It is also worth noting, however, that low electricity costs have long been an advantage for BC industry.
BC has amongst the lowest business taxes in Canada – a country that has seen major provincial and federal corporate tax cuts over the past 20 years.
So, there is a case for PST exemptions on a business input like electricity, but such exemptions should be offset with measures like an increase to the corporate income tax rate, eliminating various corporate tax deductions (such as deductions for meals at luxury restaurants and “entertainment expenses” like box seats to the Vancouver Canucks) or a surtax on excessive CEO pay.
The next cut is to the small business corporate income tax rate, which applies to corporations with active business income less than $500,000 per year. The BC rate is already the second lowest in the country and will now drop from 2.5% to 2% (compared to 11% for the general corporate rate). That comes at a cost to the public purse of $46 million a year.1
Economists from many quarters have long argued that this special rate makes for bad economic policy. One key reason is that the small business rate is frequently exploited as a tool of tax avoidance for well-off professionals like dentists, who incorporate as single-person businesses in order to lower their taxes. There is a case for helping new and small businesses that are at a structural disadvantage to large corporate competitors. But economists increasingly agree that this should be done via more narrowly targeted measures rather than blanket rate cuts based solely on firm size (which have the corrosive side effect of enabling the well-heeled to avoid taxes).
Another $175 million tax break for business in the BC budget is the extension of provincial scientific research and experimental development (SRED) tax credits. These types of credits, offered by both the provincial and federal governments, are widely seen as extremely generous in Canada compared to other countries, but not necessarily effective. A review commissioned by the federal government itself found there was “no evidence-based reason” to choose SRED tax credits as a tool to encourage innovation as opposed to, for example, publicly financed research in universities.
Finally, and less obviously, business will receive approximately another $235 million in savings as a result of the plan to reduce MSP premiums by half starting in 2018.2
The CCPA-BC has long called for the MSP to be eliminated, not just reduced. Our Senior Economist Iglika Ivanova has modelled a much more sensible plan to eliminate and replace it with a mix of a business payroll tax and progressive income taxes (instead of simply lowering public revenue – and therefore our capacity to make critical public investments).
A major advantage of Iglika’s plan is that businesses would be required to share in the cost of health care on a level playing field – via a single payroll tax – rather than the current situation where some “good” employers are willing to pay for MSP while others contribute nothing at all.
Unlike the Budget 2017 promise to reduce MSP premiums, Iglika’s plan would not slash revenue from the public purse, and it would still leave most British Columbia households with more money in their pockets. The additional income tax revenue would be raised based on ability to pay and, for the vast majority of families it would be more than offset by savings from eliminating the MSP.
All told, BC’s government will forgo more than half a billion dollars in public revenue annually once Budget 2017 business tax measures are fully implemented.
All told, BC’s government will forgo more than half a billion dollars in public revenue annually once Budget 2017 business tax measures are fully implemented. We must remember that these are the only new tax measures that are booked as revenue losses in this year’s budget. In other words, these incentives are on top of the enormous business tax cuts the provincial government has handed out over the past decade and a half. Never mind that this government has also fundamentally reshaped the personal tax system over that period so that households in the top 1% now enjoy a $39,000 per year tax cut compared to what they would have paid in the 2000 tax system.
In and of itself, at least one of the business tax changes in Budget 2017 has merit. Unfortunately, instead of making up the revenues elsewhere and delivering on important social investments, the BC government decided to simply hand more than half a billion dollars a year to the business sector – in a province that already has the lowest business taxes in Canada.
Put in perspective, this $600 million per year would be more than two thirds of the funding needed to build a universal $10/day childcare system in BC (with no federal assistance) or it could be used to make important new investments in housing, health care, education or poverty reduction.
Budget 2017 adds to a long and steady erosion of BC’s public sphere, which has seen provincial public spending shrink substantially as a share of our total economic pie. Meanwhile, under-investment in BC’s public services continues to perpetuate inequality and poverty, undermine affordability, put our environment at risk, and ultimately damage people’s lives.
 The full cost is $72 million per year in 2018/19, but it’s partially offset by a decrease in the dividend tax credit rate for ineligible dividends, which brings the net cost of the cut down to $46 million per year.
 We can reasonably approximate how much lost revenue will flow to business as a result of the MSP plan, since we know that roughly 40% of those British Columbians who pay MSP are covered by their employer (and roughly 30% of those covered by their employer are public employees like teachers and hospital workers). Since the budget shows that total annual revenue lost from the MSP reduction will be $845 million, we can approximate that about 28% (i.e., 40% of 70%) of that will flow to private employers: about $235 million per year. Note also that in the budget, the government suggests that businesses that currently cover MSP and employees should negotiate to share in the benefits from the promised reduction in 2018. The government ought to lead by example on this by passing on its own savings as an employer to public sector workers. If businesses do pass on the savings to their employees in the form of higher pay, that would offset a portion of the savings to business projected here.