Oct 2, 2020

Tax cuts won’t cure what ails us


Major tax cuts are on the table in BC’s election—namely, cuts to the provincial sales tax (PST) and speculation tax. But these proposals won’t help us meet the challenges the province faces. Whether the goal is economic stimulus, helping households in need or addressing long-term gaps in our social and physical infrastructure, tax cuts are not up to the job. 

What’s needed now and in the coming years is a significant increase in public investment in BC. Historically, slashing public revenues has also been a precursor to cuts in services. 

Let’s consider each of the tax policy proposals in turn.

PST cut not efficient as stimulus, doesn’t address need for public investment

The BC Liberal party recently announced its plan to eliminate the PST for a year and reduce it from 7% to 3% after that for an indefinite period “until the economy recovers from the COVID-19 pandemic.” This would come at a likely cost of over $8 billion in the first year. (The party’s press release lowballs the cost at $6.9 billion, seeming to use government revenue projections for the current fiscal year, which is not a good baseline since the pandemic lockdown has cratered retail sales and resulted in unusually low PST revenues.)

As an economic stimulus measure, a PST cut falls short. That’s because while some new consumer spending would result, much would also go into savings, especially for those with higher incomes. In an economic downturn, direct public spending is a more-effective and immediate way to put dollars into the economy. 

In short, if BC is going to deploy a further $8 billion on stimulus, cutting the PST is an inefficient way to spend it, and there are better alternatives at hand. 

BC has a huge backlog of badly needed and highly productive public investments in areas like affordable child care, non-market housing, public transit, infrastructure and climate action. Direct public spending would more effectively stimulate the economy, help tackle key affordability crises that so many BC residents are struggling with, and build out our social and physical infrastructure for the long term. Unlike a tax cut, this type of stimulus spending addresses both economic and social priorities, achieving short- and long-term goals.

The money allocated to a PST cut could be used instead to support the incomes of those who have lost work or faced increased costs as a result of the pandemic. For example, for about $3 billion, BC could distribute another round of the Emergency Benefit for Workers (and double it to $2000 this time), raise social assistance and disability rates up to the poverty line and still have $5 billion left for new investments in child care, affordable housing and more. 

As my colleague Marc Lee argues in detail, to help struggling British Columbians in an equitable way, there are much better approaches than a PST cut.

Finally, in the absence of a clear end date or an alternative revenue source, cutting the PST would blow a multibillion-dollar structural hole in the provincial budget, which—as in the past—could be used to justify austerity and public spending cuts in years to come.

Scrapping speculation tax would be step backward on housing policy

The PST cut has garnered the most attention, but another notable tax policy brought forward (also by the BC Liberals) is eliminating the recently enacted speculation and vacancy tax. The proposal would replace it with a much narrower tax on capital gains from condo presales.

Eliminating the speculation tax would be a mistake, as it serves important functions. Amid an acute housing shortage and affordability crisis, it encourages homes to be used as homes, taxing those that sit empty in parts of the province worst affected by the housing crisis. The tax also applies to so-called “satellite families” with high worldwide incomes and low BC incomes. 

There is some uncertainty about the extent to which the policy actually results in homes being returned to the long-term rental market versus generating revenue that is earmarked for investment in affordable housing. The good news is both are welcome outcomes. The speculation and vacancy tax raised $115 million for housing investment last year.

As I have argued previously, the speculation tax is one important piece of the puzzle when it comes to housing affordability in the province, but it doesn’t go far enough. 

Given that land wealth has become a massive source of inequality in this province, requiring a small sliver of the wealthiest landowners to pay a little more is a positive step. Across the province, total property wealth has increased by over $1 trillion since the mid-2000s. If even a modestly larger fraction of this highly concentrated wealth were captured for the public good, this could help fund transformative investment in affordable housing. 

Unfortunately, the proposal to eliminate the speculation tax takes us in the opposite direction. While there may be a place for a condo presale “flipping” tax, we need an approach to the housing crisis that builds on progress to date, not drops ambitious policies for boutique ones. 

BC needs major new public investments, not tax cuts

In the polling data we published over the summer, British Columbians across party lines overwhelmingly backed rebuilding a more equitable and sustainable economy, not a return to the pre-pandemic economy. This could be seen in responses to questions about broad principles and on specific and highly ambitious policy proposals. To name a few, the poll showed strong majority support for making seniors care a universal public program (including taking over for-profit long-term care homes), aggressively increasing investment in affordable non-market housing, and raising social assistance rates above the poverty line.

We cannot “tax cut” our way to achieving these goals. Indeed, the same poll indicated strong, cross-party backing for increased taxes on wealth and corporate profits. Looking ahead to BC’s policy future, tax cuts are neither an efficient means of immediate economic stimulus, nor can they help meet critical long-term goals that require we pool our resources and invest together.



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