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Return Of The PST Darkens B.C.'s Economy

04/11/2013 06:38 EDT | Updated 06/11/2013 05:12 EDT
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It was no joke; on April 1st B.C. officially scrapped the HST and in one fell swoop, restored the old Provincial Sales Tax system.

But moving back to the PST will cause harm to the provincial economy and B.C. families will lose out on the increased prosperity and jobs that the HST would have encouraged. Since our province will be poorer with the PST, it falls on our political leaders to take action to lessen the impact.

To understand why the switch to the PST is so harmful we must first highlight the key difference between the two sales taxes.

Under the HST entrepreneurs do not pay sales tax on business inputs including equipment, materials, energy, and other goods or services they purchase and use to produce what they sell to their customers. In other words, the HST only taxes the final consumption of goods and services, not the items used for production.

The HST exemption for capital inputs is especially important because investments in things like machinery, equipment, and technology give B.C. workers the tools to be more productive. And more productive workers can command higher wages.

With the PST, however, business inputs are subject to sales tax. So as of April 1st the cost of investing in the province will increase dramatically, making it more expensive for B.C. businesses to operate, expand, upgrade, and innovate. In fact, BC's overall tax rate on new investment will go from approximately 16 per cent (with HST) to 27 per cent (with PST)--the highest rate in the country. In a world where jurisdictions are competing for mobile investment dollars, the PST means less investment, weaker economic growth, and fewer jobs in B.C.

But there was a glimmer of hope that tax reform to offset the PST might be on the government's agenda when it appointed the Expert Panel on Business Taxation in early 2012. Made up of a cross-section of people from business, academia, and government, the Expert Panel sought input from British Columbians as it examined ways to make B.C.'s business taxes more competitive for attracting investment given the PST's return.

Our submission to the panel offered many reform options but the most important was to enact a complete PST exemption for business inputs and especially machinery, equipment, and technology. Doing so would remove the sales tax penalty on capital goods and retain a key advantage of the HST.

Fortunately, the panel agreed and a version of this policy appeared in its final report. Specifically, their key recommendation was to introduce a refundable investment tax credit equal to the PST paid on machinery and equipment including computers and software (the final report contained a total of 38 recommendations, not all of which we agree with).

Although positive, the panel's key recommendation would not fully offset the impact of the PST-- it eliminates the PST on capital goods but not other inputs such as building materials. For this reason the panel also recommended a more comprehensive solution that would see the PST replaced with a sales tax system that more closely mirrors the HST.

Unfortunately, the final report and recommendations failed to spark much debate about B.C.'s tax competitiveness. Worse, neither the governing Liberals nor the opposition NDP have shown any public support for the panel's recommendations or talked about the importance of reducing the damaging impact of returning to the PST.

Instead, the BC Liberals delivered a pre-election budget in February proposing a series of economically damaging tax increases including a one percentage point increase to the corporate income tax rate and a new top personal income tax rate on upper-income British Columbians. These tax increases could not come at a more inopportune time, since they will further discourage investment and entrepreneurship in B.C. precisely when tax policy improvements are most needed.

The NDP's tax plan would also discourage investment as it proposes to raise corporate and personal income taxes and reinstate the capital tax on financial institutions. Here we have tax policies from the province's two main parties that would exacerbate, rather than mitigate, the PST's negative impact.

With a May provincial election approaching, we don't expect any change on the PST front in the immediate term. But after the dust settles, whoever forms the next B.C. government should dig up the panel's report and seriously consider taking action to cushion the PST's adverse economic effects. After all, the prosperity of B.C. families is at stake.

This column was written with assistance from Hugh MacIntyre, Fraser Institute policy analyst.