Tax reform key to increasing investment in B.C.

Earlier this year, the provincial government commissioned a group of experts to provide recommendations on how to make B.C.’s business taxes more competitive and conducive to investment. Their final report was just released and the main recommendation is to fix the economic damage imposed by B.C.’s poorly designed provincial sales tax, which has particular features that discourage investment. The ball is now in the government’s court to take necessary action.

The impetus for action is clear. The level of investment in B.C. is low both by Canadian and international standards. As the commission’s report points out, relative to the size of the economy, B.C. has the third-lowest investment level in Canada.

Meanwhile, the level of investment per worker in B.C. is a fraction (just three-quarters) of the average in industrialized countries.

Low investment has serious economic consequences. It means B.C.’s standard of living is less than it could otherwise be. When businesses invest in machinery, equipment and technology, workers are able to produce more and create higher-valued output for each hour they work, increasing their productivity.

And increased productivity ultimately leads to higher wages and living standards.

Investment is also important because it creates jobs and opportunities for British Columbians. It leads to new and improved products and services that improve people’s lives. By many measures, investment helps propel economic well-being.

So what’s holding back investment in B.C.? A major culprit is the province’s uncompetitive business-tax regime. This may surprise some people given that B.C.’s corporate income-tax rate is low compared with other provinces.

However, the corporate income tax is only one of many factors that affect the overall taxation of new investment, which also depends on tax credits, sales taxes on investment transactions and other forms of taxation. After accounting for all factors, B.C. has one of the highest overall tax rates on new investment in Canada and the developed world. And the main driver of B.C.’s high overall rate is the PST.

The PST taxes the production process, imposing a sales tax on business inputs (machines, equipment, materials, energy and other items) used by entrepreneurs to produce and sell their goods and services.

This significantly raises the cost of investment in the province, making the PST a particularly damaging tax. In contrast, many of B.C.’s competitors have moved to a value-added sales tax such as the abolished harmonized sales tax, which exempts business inputs from sales taxes.

If the government is serious about attracting more investment, it must reform the PST.

While the best option is to move to a value-added sales tax, the government is unlikely to bring back the politically hot HST.

Fortunately, there are other ways to minimize the economic damage. In our submission to the commission, we recommended a complete sales-tax exemption on all business inputs. The commission agrees.

Specifically, the commission recommends the government immediately exempt business inputs such as machinery, equipment and other capital expenditures. And that other business inputs, such as electricity and software, be exempted if the government has the fiscal capacity to do so in the short term.

In the longer term, the commission proposes replacing the PST with a “made-in-B.C.” value-added sales tax.

This, of course, isn’t the first time the government has heard these recommendations about the PST.

A previous expert panel established by the government made similar recommendations in 2012.

The time for study and consultation is over.

If the Clark government wants to attract investment and increase the prosperity of British Columbians, reforming the PST is the right way to do it.

Charles Lammam is a director of fiscal studies and Hugh MacIntyre is a policy analyst at the Fraser Institute.