B.C. tax hikes could trim investment, economists say

Tax hikes for the wealthy and on corporations introduced in Finance Minister Carole James’ budget update Monday are unlikely to put an immediate dent in the economy but could dampen future investment, according to economists.

The 2.1 per cent increase in B.C.’s top marginal personal incometax rate to 16.8 per cent and a one per cent increase in the corporate income-tax rate to 12 per cent will take effect Jan. 1.

The changes were telegraphed as B.C. NDP election campaign promises well ahead of Monday’s budget update, so they didn’t surprise anyone, said James Brander, an economist in the Sauder School of Business at the University of B.C., and they are relatively small.

“They’re not big enough to cause an exodus tomorrow or this year,” Brander said. “But I think they are big enough to have some effect on (business) location decisions down the road and on tax avoidance activity (by individuals) for sure.”

The NDP brought in the increases on the premise that “those at the top can pay a little bit more to be able to contribute to the services and programs for all British Columbians,” James said in her budget speech.

For businesses, the one per cent increase is expected to generate an additional $103 million in its first partial year from January to the end of March of 2018, then $313 million in its first full year.

But the rate will still be competitive with surrounding jurisdictions, said Jock Finlayson, executive vice-president and chief policy officer for the Business Council of B.C.

“Having said that, economists would be unanimous, I think, in saying that higher effective tax rates on earnings, almost by definition, have a negative effect on capital formation and investment,” Finlayson said.

That means in a higher tax environment, businesses need to earn a higher profit to justify additional investment in that location, he said, which is where a longer-term impact might come out of B.C.’s business tax change.

The promise to cut Medical Service Plan premiums in half, then eliminate them, has a significant positive impact on companies that pay those costs, Finlayson said. The $5-per-tonne increase to the provincial carbon tax, however, is negative.

Finlayson said the increase to the top marginal personal income tax rate for people earning more than $150,000 per year might be a bigger concern, since it is combined with the four per cent increase added to the federal top marginal tax rate for those earning more than $250,000 enacted in 2016.

According to Canada Revenue Agency statistics, about 80,000 B.C. tax filers fell into that income bracket in 2014.

For someone earning $200,000, the 2.1 per cent provincial increase will add $1,050 to their tax bill, bringing it to $66,748 in 2018 (with $22,516 of that as provincial tax, compared with $21,466 under the previous rate).