British Columbia is officially in election mode and the parties are rolling out their campaign promises. When it comes to the tax promises of the two mainstream parties, British Columbians are confronted with a choice, as it were, between higher taxes or even higher taxes. So pick your poison.
To see how they stack up, let's look at each plan for the most important types of taxes. It's not a pretty picture.
In one corner we have the Liberals' plan, which was unveiled in February's pre-election budget. The Liberals proposed a series of economically damaging tax increases including a one point increase to the corporate income tax rate (to 11 per cent from 10 per cent) and a higher top personal income tax rate on British Columbians earning more than $150,000 (16.8 per cent vs. 14.7 per cent). Importantly, the latter would affect the types of skilled workers B.C. wants to attract and retain such as doctors, lawyers, engineers, senior managers, accountants, and those in other professional occupations.
In the other corner is the NDP plan, which we learned about more recently. Like the Liberals, the NDP also wants to increase personal and corporate income taxes (and others) but by much more.
According to the NDP's fiscal platform, the party plans to hike the corporate tax rate further to 12 per cent and increase the top personal rate to 19 per cent. And their plan doesn't stop there. The NDP also plans to reinstate the financial corporate capital tax (three per cent on banks and one per cent on financial head offices in B.C. including credit unions). There's more: they plan to expand the carbon tax's base so that it applies to more businesses including those in B.C.'s resource sector.
No matter how you slice it, both plans will hurt B.C.'s economic prospects.
While all taxes impose costs, the types of increases being proposed are among the most costly. Economic research consistently finds that personal and corporate taxes impose higher costs in terms of reduced economic growth because they have a greater adverse effect on people's decisions to work, save, invest, and be entrepreneurial.
The personal tax increases will make B.C. less competitive in attracting and retaining skilled workers and professionals (doctors, engineers, etc), particularly vis-à-vis neighbouring Alberta. Currently, such workers in B.C. pay a top income tax rate that is 47 per cent higher than their Alberta counterparts. Under the Liberals' plan, the top rate will be 68 per cent higher than Alberta's. Under the NDP's tax plan, the differential is a whopping 90 per cent.
On business taxes, economic research is again crystal clear: higher corporate taxes decrease investment, entrepreneurship, and economic growth. Workers ultimately lose through lower wages and fewer job opportunities.
The NDP's proposal to reinstate the corporate capital tax similarly flies in the face of sound economic policy. This highly damaging tax is levied on a firm's capital (equity and debt) regardless of profitability; it costs a lot in terms of reduced investment and productivity but brings little revenue in return.
Making matters worse, the proposed tax increases of both parties come at an inopportune time. Recall, B.C. recently scrapped the HST and returned to the non-investment friendly PST--a sales tax levied on production inputs and critical investments in machinery, equipment, and technology. Rather than mitigate the PST's negative impact, both tax policy platforms exacerbate the PST's return by further discouraging investment and entrepreneurship.
With their tax promises, neither party is heeding the lessons from B.C.'s history. Back in 2001, the provincial government enacted a comprehensive tax reform package that paved the way for stronger economic performance. Specifically, the government reduced the corporate income tax rate to 13.5 per cent from 16.5 per cent (with later reductions to 10 per cent) and put forth a plan to eliminate the corporate capital tax. The tax cuts were not limited to business; the government also enacted a 25 per cent across-the-board reduction in personal income tax rates.
Research by a leading Canadian economist, Professor Bev Dahlby of the University of Calgary, found that B.C.'s 2001 tax cuts were "partly responsible for the province's higher economic growth rate from 2002 to 2006" and have produced "significant long-run economic gains."
Good tax policy should cross party lines. Fortunately, over the past 15 years provincial governments across the political spectrum have recognized this and implemented pro-growth tax reform--be it NDP governments in Saskatchewan and Manitoba, Liberals in B.C. and New Brunswick, or Progressive Conservatives in Alberta.
Whoever emerges victorious in B.C. should take notice and reconsider their tax policy promises. The economic health of our province is at stake.