B.C. is now distinctly uncompetitive with respect to personal income taxes and, to a lesser extent, corporate income taxes
"It's déjà vu all over again," Yogi Berra once famously said. One could certainly say the same thing about B.C.'s post-election budget, delivered by Finance Minister Mike de Jong on June 27.
Aside from a few minor revisions to the revenue projections, it is essentially the same budget as he delivered back in February.
While there are some important advances worthy of praise, the tax and debt increases included in the budget will unfortunately impede B.C.'s competitiveness.
First the good news.
Returning to a balanced budget this year (2013-14) is a marked improvement over the $1.15 billion deficit recorded last year. It means British Columbia will no longer be borrowing to pay for current programs.
And the BC Liberals have recommitted to constraining spending. Total ministerial spending will increase by a modest 1.5% in 2013-14.
The problem is, the Liberals chose to increase taxes as part of the deficit solution.
Worse, the taxes raised will impair B.C.'s competitiveness and, in doing so, reduce economic growth in the future and the jobs that come along with it.
Specifically, the Liberals propose to increase the corporate income tax rate to 11% one year ahead of schedule (effective April 1, 2013) and to introduce a new top personal income tax rate of 16.8% on income over $150,000. The Liberals have indicated that the new personal income tax rate is only temporary through to the end of 2015, though, as Nobel laureate Milton Friedman used to say, there is nothing as permanent as temporary government programs.
Economic research both in Canada and internationally consistently demonstrates that investment, work effort, entrepreneurship and business development are sensitive to corporate and personal income tax rates. By increasing both, B.C. has reduced the incentives for these beneficial activities.
B.C. is now distinctly uncompetitive with respect to personal income taxes and, to a lesser extent, corporate income taxes.
Its top personal income tax rate, which affects skilled professionals like doctors and engineers, business owners, and investors – all people we want to attract to the province – is now 68% higher than Alberta's comparable rate: 16.8% vs. 10%.
Additionally, Washington state, with which we also compete, maintains no personal income tax whatsoever.
The increase in the corporate income tax is relatively small except when combined with the return of the PST, which applies to business inputs and therefore increases costs. The combination of both policies will impair B.C.'s tax competitiveness.
The tax increases were put into place to balance the budget and ensure we are not burdening the next generation of British Columbians with increased debt.
And while the budget was "balanced," the provincial debt continues to increase unabated.
The reason for this seeming contradiction is that B.C. separates its annual (or operating) budget from its capital budget.
Over the course of the three years included in the budget plan, B.C.'s total debt will grow by some $14 billion to $69.8 billion in 2015-16 from $55.8 billion today.
Beyond the longer-term risk of accumulating debt, there is also a short-term risk of debt-servicing costs, i.e., interest.
B.C. will spend $2.5 billion in 2013-14 on interest costs, which is money not spent on health, education, or infrastructure.
The risk is that interest rates increase and the cost of maintaining existing debt also increases, which will squeeze spending on other priorities.
While the B.C. Liberals are rightly trumpeting a balanced budget, it has some problematic aspects.
The 2013 budget has made B.C. less attractive for investment, skilled and educated workers, and entrepreneurs. As a result, the province's economic future looks less bright. •
