British Columbia’s top personal income tax rates are back to where they were in the 1990s – and B.C.’s economy is once again struggling. Fortunately, the province can learn from reforms implemented by Gordon Campbell’s government and turn this ship around.
When Campbell was elected premier in 2001, he inherited a stagnant B.C. economy, the result of decades of sluggish growth. For perspective, from 1977 to 2001, B.C. had the lowest average economic growth per person among any province. From 1990 to 2000, B.C. recorded a net decline of 5.9 per cent in per-person income (after tax, inflation-adjusted), while Ontario, Alberta and Canada as a whole all experienced income gains.
High personal income taxes (PIT) were partly to blame. In 2000, B.C. was tied for the second-highest top marginal personal income tax rate (20.9 per cent) among the provinces. High personal income tax rates make it harder to retain and attract high-skilled workers such as entrepreneurs, businessowners, doctors and scientists who provide vital services and help fuel strong economic growth. Indeed, while workers consider many factors when deciding where to live and work, personal income taxesremain a key factor.
At the same time, high personal income tax rates discourage productive activity by reducing the reward from work, savings, entrepreneurship and investment. As a result, high income tax rates tend to negatively affect economic growth.
To address the province’s stagnating economy, the Campbell government introduced a comprehensive tax reform package in 2001, which included lowering the business income tax rate, eliminating the capital tax on businesses (excluding banks and other financial institutions), and crucially reducing personal income tax rates by 25 per cent (on average) over two years.
Once the tax cut was fully implemented in 2002, the top provincial tax rate was reduced from 20.9 per cent to 14.7 per cent. And B.C. went from having the second-highest top marginal personal income tax rate in Canada to the second-lowest.
This made B.C. more attractive to high-skilled workers, businesses, investment and entrepreneurship, which translated to greater economic growth – an estimated 25 per cent higher than it would have been without tax reform. Among the provinces, B.C.’s economic performance was now above average.
Unfortunately, today we’re back to where we started. From 2017 to 2020, the Horgan government increased B.C.’s top personal income tax rate from 14.7 per cent to 20.5 per cent – almost precisely where it was before the Campbell reforms. Combined with a top federal tax rate of 33 per cent, B.C. now has the fourth-highest top combined federal/provincial income tax rate in Canada and the United States at 53.5 per cent.
And once again, B.C.’s economy – and British Columbian incomes – have stagnated. B.C.’s economic growth per person is expected to be lower this year than in 2018 – in fact, the Eby government expects negative economic growth per person this fiscal year. B.C. ranks dead last among eight peer jurisdictions (including Washington state, Oregon and Alberta) on median employment income at $34,008, significantly lower than fourth-place Alberta ($47,307).
But B.C. isn’t doomed to this economic fate. If the government reduces personal income taxes to help attract high-skilled workers and encourage productive activity, it can help solve some of the province’s economic problems. As history has shown, personal income tax reductions can give a desperately needed boost to economic growth in B.C.
Tegan Hill and Jake Fuss are economists with the Fraser Institute.
