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Return to PST should prompt tax reform, says Fraser Institute
If BC wants to reduce the negative effects that reintroducing the provincial sales tax will have on the province’s investment climate, it should consider exempting all business inputs from the PST, among other reforms, says Charles Lammam, Fraser Institute associate director of tax and budget policy research.
The recommendations are contained in a report Lammam and two co-authors submitted to the British Columbia Expert Panel on Business Taxation. Made up of a cross-section of BC tax and finance experts, the Expert Panel was appointed in January by Finance Minister Kevin Falcon to provide analysis and recommendations to the province on business tax competitiveness and administrative improvements to streamline the Provincial Sales Tax.
"Different taxes impose different costs on the economic well-being of BC families. The PST is one of the most detrimental forms of taxation because it taxes production and drives up the cost of investing in BC," Lammam said.
"If the government wants to provide more opportunities for families to prosper, it should consider tax reforms that will reduce the PST’s negative impact, make BC a better place for investors to set up operations or expand, and enable the province to better attract and retain highly-skilled workers."
With the return of the PST, Lammam notes that BC will have one of the highest overall tax rates on investment, putting it at a distinct disadvantage compared to key provincial competitors like Alberta, Saskatchewan, and even Ontario.
"BC is competing with these provinces and other jurisdictions for investment dollars and skilled workers. With the introduction of the HST, BC improved its tax policy competitiveness. By returning to the PST, we’re taking a step backwards and making ourselves less competitive."
The submission to the Expert Panel recommends:
Introduce a complete sales tax exemption on all business inputs, especially machinery, equipment, and new technologies;
Reduce the general corporate income tax rate to eight per cent from its current 10 per cent rate through a phased-in reduction;
Reduce the disincentive for small businesses to grow by increasing the threshold of income eligible for the preferential small business tax rate of 2.5 per cent to $1 million from $500,000;
Equalize property tax rates across business classes. Determine ranges of fairness and thresholds based on average property tax rates in municipalities for different major classes and require all tax rate changes to move toward this range and Reduce the province’s middle and top marginal income tax rates to make them competitive with Alberta.
Specifically, gradually collapse the top three marginal rates (14.7 per cent, 12.3 per cent, and 10.5 per cent) with the ultimate goal of moving toward a flat tax rate on personal income equal to the Alberta rate of 10 per cent.
Lammam pointed out the recommended tax changes could be implemented within the provincial government’s balanced budget framework so they do not increase government debt.
This could be accomplished by broadening the consumption tax base of the PST and eliminating many of the special exemptions. The provincial government could also eliminate or scale back many of the corporate and personal income tax credits currently offered.
"While expanding the list of goods and services subject to the PST may not be politically feasible, the government currently provides numerous tax credits with questionable economic value to certain businesses and individuals that come at the expense of others. Eliminating these credits would broaden the tax base while simplifying the tax code," Lammam said.
"Most importantly, the government should refrain from increasing taxes that are highly economically damaging, such as personal and capital-based taxes, as it seeks to garner revenue for other tax reductions.
"Alternatively, it could wait to enact the proposed tax reforms until after the budget is balanced and revenues become available."