In light of the latest provincial budget tabled last month, it’s now clear that the current B.C. government, like its federal counterpart, is not interested in competitiveness – that is, making sure the province is competitive and attractive to entrepreneurs, professionals, business owners and investors is not a priority.
This failure to focus on competitiveness will inevitably adversely affect the economy and all British Columbians.
The budget should have solidified provincial finances in the face of a slowing economy and ensured competitiveness. It did neither. Instead, it assumes economic growth of 2% with the slimmest of margins to achieve a balanced budget. Any slowing of growth will easily throw the province into deficit, which will be on top of the capital borrowing already planned by the government. Indeed, the budget expects provincial debt (net of financial assets) to increase to $58.7 billion from $44.5 billion over the next three years.
On the key issue of tax competitiveness, the budget failed miserably. First, the John Horgan government ignored repeated calls to make the province’s business taxes more competitive. The business income tax rate in B.C. (12%) will be 50% higher than next-door Alberta’s comparable rate (after Alberta’s reductions come into full effect and its rate drops to 8%). Indeed, B.C. has the highest effective (all-in) business tax rate on new investment.
But at least the budget didn’t hurt business tax competitiveness as it did personal income taxes by increasing the marginal personal income tax rate on professionals, entrepreneurs, business owners and other top talent to 20.5% from 16.8%. This means B.C. now essentially has the second-highest personal income tax rate (along with Ontario) in the country, with only Nova Scotia having a higher rate. More importantly, it means B.C. now has one of the highest rates in North America. (Meanwhile, neighbouring Washington state has no state-level personal income tax.)
Simply put, it will be more difficult to attract top talent – again, professionals, entrepreneurs, business owners and investors – to the province with such an uncompetitive tax rate. And it could get worse. While speculative, there’s an expectation that reform-minded Alberta Premier Jason Kenney will lower personal income tax rates in the near future, perhaps even returning that province to the country’s only single-rate tax (10%). This would mean B.C.’s rate would be more than double the potential comparable rate in Alberta.
And unfortunately, B.C. has suffered from a lack of competitiveness with neighbouring Alberta before. Late Alberta premier Ralph Klein once joked that B.C. premiers were among his best cabinet ministers because B.C.’s uncompetitive policies made it easier for him (i.e., Alberta) to attract top talent and investment.
Finally, the B.C. government claims the tax increase will affect only a small portion of the population, but in reality, its effects will ripple throughout the economy. To improve the quality of life for British Columbians, economic growth rates must be higher, which means encouraging (not discouraging) productive economic activity such as entrepreneurship, innovation, investment and work effort through lower – not higher – tax rates.
Tax increases will reduce B.C.’s competitiveness and impair the province’s economic prospects. If the B.C. government wishes to increase the prosperity of all British Columbians, it must focus on improving economic growth and lowering tax rates. •
Jason Clemens and Jake Fuss are economists with the Fraser Institute. This op-ed was co-authored by Milagros Palacios, a Fraser Institute economist.
