Debate #1 in the #BCLibs18 Leadership Race

Today the BC Liberals had their first so called debate in their leadership race. I say so called since there was no actual debate. It was two hours of vague answers to questions, with most speakers, most notably Dianne Watts, being cut off half way through their answers as they were unable to manage their alloted time.

Overall, there were not many details provided by the candidates about their policies, possible because none of the six current candidates have a detailed platform, or so it seems by reviewing their leadership websites. The main themes that did come up were: 1. they are a free enterprise party (I’ll remember this the next time I critique a platform because I could rip past platforms to shreds on this principle); 2. they need to strike a better balance between fiscal stewardship and investments in program spending; and, 3. they are scared as hell about the province moving to proportional representation.

With so much vague detail there is little to critique, though I could mention the irony of our former Minister of Transportation mentioning that the province needs a transportation plan and a better relationship with Metro Mayors. There were, however, three gems that came up that are worthy of this blog.

First, Andrew Wilkinson is committed to providing a tax deduction for tutors. We can talk about how tutors are a luxury afforded by households with the income available to pay for them. We can talk about how tutors are not a cost incurred to earn an income and therefore not an item we would consider worthy of a tax deduction. Instead, I will note that this is once again an example of the BC Liberals showing their lack of understanding with basic tax nomenclature. Under the tax collection agreements with the federal government, the provinces can’t enact tax deductions. They are wed to the federal definition of taxable income. They can enact tax credits. Tax credits are not tax deductions. Stop calling tax credits tax deductions! The BC Liberals did this in the election. Get the nomenclature correct because it is really hard for me, a tax economist, to think you are truly a fiscal steward when you can’t get basic tax and spending nomenclature correct. Oh and by the way, a tax credit for tutors is just as terrible an idea as a tax deduction. Stop with tax credits. All you are doing is taxing people throughout the year, creating all those distortions, and giving it back to a chosen few at tax time who do things they would have done otherwise, all while paying for the administrative costs of the tax credit.

Second, Sam Sullivan answers my call to arms that we, as a province, put our big girl pants on and have an adult conversation about doing away with the PST in favour of a VAT. Sam wants a modified value added tax in BC, a VAT that sounds a lot like the VAT proposed by Bev Dahlby’s tax competitiveness commission last year. This is great as doing so would help address a terrible tax burden in BC, but without having any details I don’t know his plan to deal with the regressivness which is easily done through a low income transfer that we can piggy back onto the GST refundable tax credit or low income carbon fund payment.

Third, Mike De Jong outlined a plan to ensure that students are not saddled with post secondary debt by, wait for it, a BC version of the RESP grant. He firmly believes that people should pay for their education so low income families be damned. Instead, he wants to give the equivalent of a $500 RESP grant. Now no details, of course, are provided, like what contribution rate is needed to get that grant. If we assume that the program would piggy back off the federal one then $2500 would be needed to get the $500 provincial grant. There is recent data available to help us understand RESP participation and contribution rate. It seems that the overall RESP participation is just under 50% and the average holdings are just under $7k. The data shows that we have a lot to do to improve participation in RESPs, notably among low income households. Without a plan from Mike De Jong to improve participation rates and contribution amounts than all this plan does is subsidize even more of those individuals who are already saving for kids who will already go to post secondary education. I also note that he has not costed the proposal or indicated how it will be paid for (the opportunity cost). I sent him this tweet:

These are fairly basic questions that someone proposing this policy should be able to answer right now, especially one promoting themselves as a fiscal steward.

So that is round one, five more to go. I hope more detailed platforms come out, the debates, become debates, and the candidates learn to deal with the time the limits before the next one.

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CBC fails TAX 101

As many of my loyal readers know, I regularly get a bit apoplectic with the general lack of basic tax knowledge in this country, particularly by journalists. I mean, if you are going to report on tax news, you should take a soupcon of time to ensure that you are edumacated about the topic upon which you are supposedly proffering opinion and fact about. But when it comes to topics that touch on economics and tax, apparently this is a tall order, especially for the CBC.

A few weeks ago this gem came across my twitter feed. The headline reads “P.E.I. man wants to know why he pays HST on electricity he generates himself.” Well, I know without even reading it that he does not. I know if I looked at his bill that he pays HST on the electricity he consumes. That is all, nothing to see here. But gosh forbid we take a moment to think logically about this situation and the tax system.

Alright, since the journalist, one Kerry Campbell won’t do it, I’ll do it for you.

In this situation, the consumer has a “net zero” home. The important point is net. Some times the home draws power, some times the home provides power back to the system. I imagine, the home mostly draws electricity from the grid at night and does at an agreed rate. The home owner then has to pay for that electricity and that amount is subject to HST.

Now comes the second part. During the day, the home is generating surplus electricity so the home sells the surplus back to the grid. So the home gets a credit for that. But wait, the home owner is likely a small supplier, without a HST number, so, GASP [clutches pearls] does not charge the electrical provider HST.

When the bill is reconciled, the home owner is paying the HST on the power the home draws. The home owner does not get its own magical tax charge on the electricity the home sells back to the grid to offset the HST already paid. The homeowner is not, as the CBC put in the headline, paying HST on the electricity the home generates itself.

This situation is no different than for any other business activity or any other consumer. We pay tax on things we consume. When we sell things, if we are a small supplier, we don’t have to charge the tax, but there are some advantages to being a registrant, one being that you can claim input tax credits. Overall, there is nothing to see here, or at least, as a tax person, there is nothing to see here…now where are my pearls.

Update: a very smart tax accountant informed me that they have done the HST analysis for their clients and determined it was more beneficial to not register for the HST as most of the expenses are exempt supplies which don’t provide an input tax credit (thereby reducing the GST/HST paid–in this case the HST paid on the electricity consumed which is what is the concern of the homeowner). He did though inform me that  my pearls could be considered part of the uniform of a tax consultant and there for a reasonable allowance for them could be claimed; 72/168 of the cost based on average working hours for the week.

 

 

The BC Election & the BC Green Party Platform

Here we are at the half way point in the BC election and the BC Greens have released their whole platform. I’d been waiting for this release of the full platform to write up my comment. The pieces that had been released had caught my eye and the eye of many others as being actually very interesting, well thought out, and based on evidence. I think people did not want to jinx it by being overly optimistic to early on. But certainly when the Green’s released their plan to use mobility pricing to address congestion, well that was too much for this economist, earning the BC Green’s membership in the Economist Party of Canada.

All joking aside it is now time to get into the platform. I took it along as my reading material for my varied medical appointments and it provided an excellent read (along with conversation fodder with those in the waiting areas and the medical staff). People actually have a lot of really interesting questions to ask folk like me, people who are non-partisan and fairly informed on public policy matters. We had some really good chin wags and people were really interested in getting some facts on things like what was the BC debt situation, how much would day care costs and how would we pay for it, and do deficits really matter. I wish people knew that they could just ask people like me their questions. Did you know you can? Go ahead and tweet, email, or call. I’ll do my best (and I am more likely to answer the real questions and not the ones that are some variant about me being some paid hack for one of the political parties—full disclosure, not a single one has paid me or even asked me my opinion).

As always, I am going to focus on those items that are in my bailiwick. What is actually really helpful and quite refreshing is that the BC Green Party Platform starts with what I would call their guiding principles. These principles help get a sense for what the policies are intended to achieve. There is so much in this platform that it is hard to focus on just a few things, but here are a few considerations (if you are interested in post-secondary education analysis of the platforms, see Alex Usher here, you will see he is not so bully on some of the Green elements including the “ungodly bad idea to create in BC the same graduate tax credit rebate that New Brunswick, Nova Scotia, and now Manitoba all have had a shot at”).

Consumption Taxes?

On page 16 of the platform it says “Work with the federal government to streamline business and consumption taxes to avoid distorting effects on business investment decisions and to promote risk taking and innovation.” Well, holy hell! Could that be a commitment to finally do away with the completely inefficient PST system and getting us into the 21st century with an HST? I guess that is a question to put back to the BC Greens because that is sure how I, lowly tax economist, reads it and that gets me excited.

Look, I know this is a sore point in this province. I am with you that the BC Liberals completely messed up the implementation of the HST in this province. They failed abysmally and in every way in the way they announced, communicated, and implemented this hot potato and the end result was not surprising. But the problem was that it was good economics. The PST is a real drag on the BC economy; it reduces investment, slows economic growth, and leads to lower quality employment. Not particularly, the Expert Panel on BC’s Business Tax Competitiveness said

In particular, unless the PST burden on the investments BC businesses must make to remain competitive is reduced, some of BC’s recent gains in investment levels will be put at risk and this, in turn, will result in fewer job opportunities for BC workers. This core issue informed the Panel’s work and its recommendations

And, upon being direct specifically by the Minister of Finance not to recommend a return to an HST:

The Panel urges the BC Government to undertake a comprehensive assessment of a made-in-BC value added tax. The Panel believes that an alternative such as the Business Transfer Tax (BTT) discussed in the Report is a feasible option to replace the PST.

We need put emotions aside and have a logical discussion about this. There are in fact some real options moving forward including moving forward on the BTT as outlined by Kevin Milligan, the Expert Panel on BC’s Business Tax Competitiveness, or going with an HST as outlined by others. Kudos to the BC Green’s for being willing to revisit this discussion, unlike the BC Liberals who lack any degree of leadership on this topic despite promoting themselves as economic leaders.

Basic Income Pilot

The BC Greens have committed to “draw on experience in other jurisdictions to design a basic income pilot to test whether giving people a basic income is an effective way to reduce poverty, improve health, housing and employment.” I certainly hope one experience they will wait to draw on is Ontario which just announced yesterday that it is rolling out their pilots in Hamilton, Thunder Bay, and Lindsay (no relation ;-)). They will also announce an Indigenous community in the Fall, I believe. I also believe that we will be seeing results of this pilot around 2020 and I certainly hope the data will be made accessible to academic researchers! There is certainly a lot to be learned from these pilots, but do not mistake how much this is going to cost. And given the amount of time and effort BC will put into a pilot there is no reason for us not to wait for Ontario to do theirs, learn from these pilots, and then design ours based on their lessons. And let’s remember, if we move ahead with a basic income, this is not cheap, not by a long shot and the BC Greens are already taxing and spending for a very aggressive platform.

Various Property Taxes

The Greens have proposed various measures to cool the real estate and Tom Davidoff provides his always excellent assessment of these measures. There is one, though, that really gets mine and Kevin Milligan’s goat and that is the proposed measure to tax lifetime capital gains in excess of $750,000 on principal residences. There is this issue in that the provinces (excluding Quebec) have all signed the tax collection agreements. In signing those agreement the signing provinces have agreed to a common definition of taxable income that is set by the federal government. The federal government has established that the capital gains from a principal residence is exempt from capital gains taxation. This means a provinces cannot tax that income. And no, this is not a matter of a shrewd one off negotiation because this is the heart of the tax collection agreements. Now we know that Ottawa is eyeing the principal residence exemption. Effective for the 2016, all tax filers who sole their principal residence are now required to report the sale of that residence to qualify for the exemption or face stiff fines and penalties. It has been rumoured that this is the first step towards a life time cap, but it will be years before that comes into play. In the meantime, the Green’s will not be able to deliver on this platform promise.

UPDATE: Now come people are suggestion that the Greens could be proposed to do this through the property transfer system. First, their language suggests otherwise. Second, yes, such a tax has been proposed by Rhys Kesselsman but as noted by Kevin Milligan

Measuring the Economy

The BC Greens note that GDP is but one measure of how the economy is growing. This is very true. GDP is simply a measure of the “total unduplicated value of the goods and services produced in the economic territory of a country or region during a given period.” It is designed to measure certain (but not all) economic activity and is certainly not a measure of social or even economic welfare. Economists have developed many alternative measures with the intent of better assessing social welfare but nothing really provides a single result or indicator. Despite our protestations, GDP continues to be used by others as though it is THE measure of life, the universe, everything (42!). The BC Greens are, instead, proposing to develop a genuine progress indicator based on a range of indicators based on the social determinates of health. While for those more used to mainstream economic indicators this might sound out there, but economists have been long working in this area. I don’t think any one has been signed off on as being ready for prime time, but I think there is enough established knowledge in this area to make some real headway here. And my colleague Lynda Gagne as done a lot of work in this area as well and I am sure would be very interested in working with Andrew and his team.

Tolls & Congestion Pricing

Unlike the BC Liberals and BC NDP, the BC Greens are not going to eliminate tolls, instead they are going to work with the Metro Vancouver Mayors to develop and implement a rational tolling system to management congestions and finance the region’s share of the transportation plan. As I said when parsing the BC NDP platform, infrastructure is expensive and someone needs to pay for it. Not only is infrastructure expensive but in a major cities many of our roads and bridges are hugely congested as everyone gets into their cars and drives everywhere. Congestion is a fairly simply concept, things become congested when demand exceed capacity. I am sure it will come as no surprise that the origin of the concept of using prices to manage congestion is an economist, William Vickrey to be exact. He proposed increasing fares on public transit during rush hour to manage demand. He later extended the concept to road pricing. Now most people view congestion pricing as a tax grab, similar to the reaction to a carbon tax, but that can be battled by ensuring that the congestion pricing is properly communicated as revenue neutral by reducing property taxes. This is in fact an ideal situation since funding transportation infrastructure through revenues from a congestion charge rather than through property taxes is ideal as the former’s level is linked to the consumption of the funded service.

The Fiscal Plan

One thing that is impossible to summarize in this blog is the social investments that the BC Greens are outlining in their 97 page document. The BC Greens are committing to massive spending in BC, from health care to education to public safety to municipal infrastructure. By the end of the four year period, spending will have increased to nearly $4.4B in just 2020/2021 a year. To fund this increase, the BC Greens will obviously have to raise taxes. Unlike the BC NDP who opt to waive their magic wand and ignore this issue until after the costing period, the BC Greens tackle it face on. And folks it is not pretty and it gives you a good idea of what is behind the BC NDP curtain. I applaud the BC Greens for the transparency they do provide in this area, though they are still lacking some details.

Here is where the money will come from:

  1. The BC Greens commit to raising the BC Carbon Tax to $50 per tonne by 2021, one year before the timeline set by Justin Trudeau for the provinces to meet the set floor and one year before Alberta’s Carbon Tax is set to hit $50 per tonne as well. But what I did not see in this plan is any increase in the low income transfer. Maybe I missed it. In the appendix I see this “A BC government will also act to protect those on low incomes from any adverse effects of the carbon tax increases” but I don’t see a spending line item. I also note in the appendix that the BC Greens end the commitment to revenue neutrality (and so the Economists Party takes back their membership card). By 2020/21 the revenues from this increase will total $865M a year.
  1. The BC Greens buck the trend and will not, or so I read, commit to the 50% reduction in MSP premiums. Which given the substantial investment in health that they are outlining in their platform, that is reasonable. Look, health care is already expensive and eats up 50% of the BC budget as it is and that is without addressing the pressures that we have related to the opioid and mental health crises. To think we can eliminate the MSP and fund health care pressures is dreaming in gum drops, unicorns, and candy can kittens. The BC Greens are being honest and realistic with tax payers by committing to eliminating the MSP premium in full and instead immediately rolling funding to health care into the pay roll and income tax system in what sounds a lot like Option 2 proposed by Iglika Ivanova here. All in, the revenues from this will amount to $810M by 2020/21.
  1. The BC Greens will, much like the BC NDP, raise person income taxes but unlike the BC NDP are not clear on what this means for you and I. This is a vague promise that says “Begin the transition to tax fairness by increasing the share of taxation contributed by those earning over $108,460 per year over four years by 1% in 2017/18, rising to 3% in 2020/21. The BC Greens indicate that they will raise $275M a year by 2020/21 from this initiative but I have no idea how. That is what rates and for whom. The current rate for those over $108,460 is 14.7%. The BC NDP have promised to raise the rate for those over $150K to 16.8% and indicate they will raise $250K a year from that. Here is where I think the BC Greens should be much more transparent: how much and for whom because there are many permutations and combinations that potentially get the same revenue but voters should know the rates a priori.
  1. Like the BC NDP, the BC Greens will increase the general corporate tax rate to 12% which actually I was reminded the Expert Panel on BC’s Business Tax Competitiveness recommended it be increased to 11.5%. If the Green’s proceed with movement on the PST and a few other small items on business competitiveness then this can be argued as being in the realm of a revenue neutral move.
  1. The BC Greens believe they will raise $500M a year from their housing measures discussed above but the revenue from their ill-conceived principal residence capital gains tax measure will have to be netted out.
  1. The BC Greens will spend all the expected surplus, contingency, revenue growth, and the like netting them a whopping $800M a year by 2020/21. This means there is no room for fudge, emergencies, debt payment, credit rating downgrades, nothing, nada. It’s a bit risky.
  1. The Greens will expect to net about $450M a year by 2020/21 from three really interesting initiatives. First, the BC Greens get their membership card in the Economist Party back again as they will eliminate all boutique tax credits which is awesome because these things are nothing but a waste of money. Remember, say it with me: taxing you all year to give it back to a chosen few at tax time does not constitute a tax cut! Second, they will establish “a working group to develop proposal for an overhaul of the tax system that will reverse the trend to regressive taxation, streamline and simplify the tax system, and remove perverse incentives and distortionary effects.” Rock on. I think this is great (hmmm, what will the working group do if all the boutique tax credits are gone?). There is only so much that can be achieved at the provincial level, but since there is equal appetite at the federal level, there is much that could be done. And piggy back this with a mandate to crack down on the underground economy (that is not in the platform but a nudge is as good as a wink) and Bob’s your uncle as us Brit’s say. And may I say, I might know a gal for you *winks*. Third, they will, perhaps with the help of the working group “develop options to shift taxes in order to incentives choices that benefit society and disincentive choices that are harmful and costly.” That could be a sugar tax, which might not change choices but is amazing tool to raise revenue!
  1. The BC Greens will raise about $150M a year by 2020/21 from resource rents, fees, and licenses. Hmmm, not sure what this is linked to the platform and a word search got me no love.
  1. Finally, and again a word search got me no love, there is $460M a year from internal repurposing. This might be similar to the BC NDP proposal for an internal review for waste and eliminate waste and inefficiencies. The federal Liberals ran with a similar item in their platform and the Chretien/Martin Liberals had a similar exercise. In fact, most incoming governments come in with similar exercises. It is a lot of money to find, but it is not unrealistic and at least the BC Green’s have guiding principles to inform this process.

Finally, in the fiscal plan section, the BC Green’s are proposing balanced budget legislation which is not something that is necessary. Balancing a budget over a business cycle is the point of fiscal policy. So it is really unnecessary but I imagine that this is just a line item to play into some BC Liberal swing voters.

So there you go, the BC Green Plan. It is certainly more transparent on the funding side that the BC NDP. There is still room for more transparency and clarity, but if you want your government to make these kinds of investments in social programs in this province, these are the tradeoffs.

So there you have it. You now have all three platforms. It is a lot to digest. Now go read them yourselves and be sure to vote on May 9! I know I will.

Liberals Economic Consultants Fail to Find NDP Budget Crater…But Make Their Own Embarrassing Mistakes

The BC election is getting really nasty with the BC Liberals doing everything they can to prove that the BC NDP election platform is built on sand. Last week they came out with their own costing that said it had a $6.5B crater. After the media and non-partisan experts laughed that out of town, the BC Liberals next tactic was to hire Peter Devries and Scott Clark, former bureaucrats from the Department of Finance in Ottawa and current economic consultants, to blow the platform apart. Their report has been made public today and I am infuriated. So infuriated that I am not following doctor’s orders of being off the computer and instead writing this for the good voters of British Columbia. What part of reading is so friggin’ hard for the BC Liberals, their team, and their consultants?

Don’t get me wrong, I’ve got a lot of respect for Devries and Clark. I worked with them in Ottawa at Finance, I run into them at conferences frequently of late, and read their musings in the opeds. Don’t get me wrong, I am not a BC NDP supporter. I have lots of problems with their platform (see below and here) and there is a lot of room for criticism. But there is no reason to just make shit up. And that is what the BC Liberals did and what this new report also has done. Here is the report to read for yourself.

First, the economic consultants assume that the BC NDP will phase out the Medical Services Premium (MSP) within four years. The economic consultants then book $437M in 17/18, $875M in 18/19, and $1312M in 19/20. The NDP do NOT make this commitment. I mean read their platform. The NDP have committed to the same 50% reduction as the BC Liberals which is costed in their plan. Then over the three year period a

“non-partisan MSP Elimination Panel will advise how to protect health care funding while phasing out this unfair flat tax. The panel will be required to ensure low and middle-income families will come out ahead.”

So in year four, in year 2020/2021, one year beyond the platform period we will most likely have something like (this is my expert opinion based on my knowledge of the file) a revenue neutral shift away from the MSP premium into a progressive system similar to that which exists in every other province in Canada. There is NOTHING to cost, there is no CRATER, there is nothing to BOOK.

Second, the economists assume that the BC Hydro and ICBC freezes will be for four years as well. Huh? Where did they get that from? Not from the BC NDP plan for sure. There is nothing in the plan about that. What is in the plan? A plan for a plan. Nothing more. The plan is to pause all rate increases while they conduct a

“comprehensive operating review to look for inefficiencies, fiscal mismanagement, and cost savings that don’t impact services. Every dollar saved will be used to keep rates and fees down. We need to see the books to understand the full scale of Christy Clark’s mismanagement.”

Look, does this lack some transparency? Sure, but they are not in government. There is a lot of concern about rate increases. I mean, look at what is going on in Ontario. There is a lot of concern about the 50 year Independent Power Producer (IPP) contracts that BC Hydro has signed that total ($53B) more than half ($101B) of the off the books ‘debt’, sorry contractual obligations, that is hanging over the head of future generations. And whether or not the full cost of the one year freezes can covered through administrative savings, as the BC NDP platform indicates, is questionable, but to suggest that some of it can’t be is ludicrous and to say it is a four year commitment is reprehensible. If it is a four year freeze then the BC NDP had better come out and say so now, oh right, they have and said explicitly that it is not!

Third, the cost savings from waste and growth is a policy issue and not one for consultants to make a call on. I should note that Clark and Devries actually lead such an initiative in Ottawa under Finance Minister Martin where they found $3B a year through efficiency initiatives. These exercises are important and in fact realistic. Hell, just by eliminating the Home Owner Grant (HoG), we could achieve $800M a year in efficiencies (the NDP would not eliminate this I am just saying how easy it is to find waste). Is it not the place of these consultants to make such policy plays on behalf of the BC NDP when they know such savings are real because they’ve done it themselves.

Whether or not the statement about the Liquefied Natural Gas (LNG) fund is true, I don’t know. I’ve been through Budget 2017 and can’t find the line item.

The funny part about this whole thing is that if the BC Liberals would just calm down for a moment (listen to advice they gave John Horgan in last weeks leader’s debate) and listen to the non-partisan commentary in the last two weeks is that there have been great critiques of the NDP platform in that it lacks real transparency on key items (it is a plan for a plan not a plan itself) and lacks costing for long term items (it is a 10 year plan but costs only three years). Why focus on such stupid items that are so easily torpedoed when the big items are left out there flapping in the wind?

BC Election & the NDP Platform

The BC election is really heating up out here with the BC Liberals and BC NDP exchanging sharp barbs today, unsurprising since they are pretty much neck and neck in the various polls. As you may know, the BC NDP released their full platform just before the Easter long weekend and this has caused a lot of chatter. Overall, unlike the Liberal platform which was a bit of a meh (and for flips sake can’t they please correct their horrible error of calling a tax credit a tax deduction and not indicating which of the myriad of tax credits are refundable or non-refundable!), the BC NDP platform has a bit more to love (it was happily not released on flipsnack!), hate, and be confused by.

Renters Rebate

As always, I won’t go through every single thing, but instead focus on the elements that are in my bailiwick. First, is their renters ‘rebate’. To understand this, you have to understand a few things. In Canada, home ownership is subsidized up the yin yang, whether it be through the principal residence exemption from capital gains taxation, mortgage insurance backed by CMHC (ahem, taxpayers), the various tax credits to support buying or renovating a home, and the various ways we subsidize property taxes including through the Home Owner Grant (HoG) here in BC.  The HoG allows those who live in their homes to obtain a minimum $570 grant that offsets their property taxes. Rental property does not qualify for the reduction in property taxes so renters, who pay the cost of property taxes through their rental payments, bear the full cost of property taxes while home owners do not. The proposed renters rebate then simply extends the HoG to renters to address the issue of fairness. Of course, the better way would be to eliminate the HoG, but while that is good economics that won’t win you an election.

For whatever reason, people who on one hand applaud the HoG and all the other subsidies we throw at home ownership for no good economic reason, came out guns a blazing against this notion of extending the HoG to renters, including the biggest proponents of home owner subsidies, the BC Liberals. Christy Clark said it would “line the pockets of wealthy tenants…” Hmmm, I guess she does not realize that most of her policies in fact line the pockets of wealthy home owners. Oh right, home owners good, renters (like me!) bad. If we look at average household income by ownership vs rental, we don’t seem to have much to be concerned about.

The BC Liberals also said it was unaffordable. Hmmm, the HoG costs the treasury more than $800M a year and applies to more than 91% of homes in BC, but that is affordable. The renter’s rebate is expected to cost about $265M a year, but that is not affordable. Okay! When this first came out, before we had the details, I had additional comments about why it was great for tax compliance reasons here. So this is one to love.

Tolls, fares, and infrastructure

It was announced more than a week ago that the BC NDP plan to do away with tolls on the last two bridges in which they are in place (both in Vancouver), reduce ferry fares on small routes by 15% and freeze all others, and bring back free ferry rides for the old farts (Hi mum!). In total, the BC NDP cost these initiatives at $190M/yr (tolls) and $20M/yr for ferry fares.

What is missing from this is (and the BC Liberal platform which plans to caps tolls at $500 and to provide tax credits (or is it deductions?) to riders in ferry dependent communities) is the rationale. A lot of transportation infrastructure in this province is heavily subsidized, but some are very dependent on user pay. There is, right now, no real rhyme or reason for the various models in place. Are there economic and policy arguments to make to 1. Subsidize (in full or in part) or 2. Base their funding on user fees. Yes. Has the BC NDP or BC Liberals made any of these arguments? No.

Look, infrastructure is expensive and needs to be paid for somehow (neither party, in fact, says exactly how infrastructure will be paid for in lieu of these tolls and fares) but there is a real distributional argument to be made for asking someone in Haida Gwaii to pay for a road to Vancouver, but not for someone in Vancouver to pay for a road (or in this case ferry) to Haida Gwaii. There are also real distributional concerns to asking someone who never drives to pay for the infrastructure for those who do. Or why is it acceptable for transit users to pay a user fee but to ask drivers to pay a similar fee to pay for the roads they use is outrageous?

The advantage of the user pay model (via road tolls, user fees, and related user charges) is that those who actually use the infrastructure pay for it. Because of this price, they are more apt to consider the true cost in their commuting decisions and possibly make alternative choices. That is, by pricing the roads directly commuters are better able to understand the cost of the infrastructure to commute and may find that taking the bus, riding a bike, and commuting by foot provides a cheaper alternative. And when these prices are always in place, people consider these costs when choosing where to live and where to work. With capped or reduced tolls we distort these decisions since we now make driving the cheapest form of commuting when, in fact, it is one of the costliest. This is why we should expand road/bridge tolls, not reduce or eliminate them (which is the approach being taken by the BC Green Party)

However, on the other side of things is taxpayer perception. Taxpayers often perceive a lot of little highly visible ‘taxes’ (economist like visible, taxpayers don’t) as being more burdensome than one larger less visible tax. As one person on twitter put it, all the tolls and user fees made the person feel ‘nickeled and dimed’. Perception is an important part of tax policy as it features prominently in tax morality and tax compliance. The larger number of smaller taxes is more efficient than the one larger income tax, but we do a terrible job of communicating that to tax payers. Of course, politicians don’t help.

In the end, how you evaluate this policy of no or reduced tolls likely depends on whether you live in Vancouver (yeah!) or elsewhere (who cares) but that is because the platforms (NDP and Liberal) don’t tell you the opportunity cost. How are we going to pay for bridges, roads, and ferries if not by tolls and user fees? Obviously, we are going to pay for them out of general revenues from income and other taxes, but neither the NDP or Liberals have said this explicitly. So both their policies mean your income, sales, and other taxes WILL be higher than they would be otherwise because we are moving away from user pay models to everyone pays models.

Oh and discounts (or worse yet, free) to seniors have just got to stop. There is nothing about being a senior that makes you unable to pay for the goods and services provided by government, let alone taking a ferry. In fact, as a senior you are very costly. You also benefited from high government spending supported by the massive accumulation of government debt. You are the wealthiest generation ever retiring. As a group, there is nothing about you to warrant special treatment. Such pandering has got to stop. This will queue outrage about senior poverty levels. Don’t bother. Yes, some seniors are in poverty. As are much more children and young adults with far fewer social programs and income supports available to them. Seniors don’t need help, low income people need help, regardless of age.

MSP and Day Care

The two biggest spending pillars in the BC NDP platform on these two items: $10/day day care and “eliminating” the MSP premium. With respect to day care, the pledge is a 10 year commitment which means the BC NDP need, wait for it, 3 mandates to fully implement the platform. That is not unreasonable in and of itself. It is complicated to roll this out and will take time. But the NDP platform only costs the commitment over a three year period. All in, this commitment is expected to cost $1.5B a year. Now before you all freak out, it is expected that such a program will result in increased economic growth from encouraging more parents to work. Estimates predict that this growth will result in increased tax revenues that will pay for half that price tag. That would mean that only half that price needs to come from new sources. The kicker is that the platform does not indicate what the source for that is. It could come from a progressive surtax on users, similar to that in Quebec, but right now we don’t know. Should these details be included in the platform? Yes.

With respect to MSP, this election is very much boiling down to the MSP as this is the biggest item in the BC Liberal platform. The BC NDP platform though is a bit hard to understand what they are committing to. First, the BC NDP will go ahead with the 50% reduction announced in Budget 2017 and will eliminate the fee within four years. But that elimination is not costed. Instead, the NDP say they will “make sure low and middle-income families come out ahead.” And they will appoint “a non-partisan MSP Elimination Panel [to] advise on how to protect health care funding, while phasing out this unfair flat tax. The panel will be required to ensure low and middle-income families all come out ahead.” This all sounds to me like MSP premiums will be folded into the tax system, similar to the model in Ontario and exactly like the model more clearly being proposed by the BC Green Party. Assuming this, there is nothing to cost because it will be a revenue neutral shift. This is exactly what was proposed by Iglika Ivanova last year and myself in 2015. I am not sure why the BC NDP couldn’t be more transparent in their platform.

Tax Rates

To pay for this there are three main tax proposals. First the BC NDP will bring back the temporary high income surtax. This is a 6th bracket for income over $150k. Currently income over $108,461 is taxed at a rate of 14.70%. The BC NDP are proposing to bringing back the rate of 16.8% for income over $150K. Here is the proposal with a comparison to Alberta

table1

There are a few things to note. How many tax filers in BC are in the +$150K income class? About 1.4% of filers, according to CRA tax filer statistics. They report an average of $285,764 in gross income and $249,757 in taxable income. The average tax filer in this bracket then would pay an additional ~$2100 in income taxes, ceteris paribus. And the BC NDP predict this will raise about $250M in annual revenue. Looking at income statistics, the estimate seem credible but there is a complicating factor: as oil prices rebound and the Alberta economy rebounds many high income individuals who moved to BC in recent years will move back to Alberta for reasons related to the economy and unrelated to the high income surtax. Many will confound the move to the tax rate and academics will have to work very hard to dispel this mobility myths. If you are interested in research on high income tax rates read here and here.

Now when I was tweeting these facts out, this happened

table 2

I am not sure what in the above deserved that, but I leave it to you to form your own conclusions. In full transparency, I am often in the 1.4% who would be affected by this new surtax and I can honestly say, don’t cry for me BC. If I leave BC, it won’t be because of the tax rates, it would most likely be the result of a lack of investment in post-secondary education. Also remember that most of these high income individuals will live in Vancouver and they just benefited from the elimination of tolls so….one hand giveth, the other hand taketh away.

The BC NDP also propose, like to the BC Liberals to drop the small business tax rate from 2.5% to 2.0% (which matches the rate in Alberta). The BC NDP also will raise the corporate tax rate from 11% to 12%, again matching the rate in Alberta. Few things to note here. First, the BC Liberals raised the corporate tax rate in 2013 from 10% to 11% so I don’t think they have much to grouse about here. Second, because the rates match that in Alberta I don’t think we have much to worry about business flight. Third, I fail to understand why small businesses are good but big businesses are bad. It makes no sense. I’ll leave that there.

Now when it comes to who bears the burden of corporate income taxes there are three options: shareholders, workers, and consumers. Fortunately, a new paper from the School of Public Policy shows the affect of an increase of the AB corporate income tax rates. Drum roll please..a 2% point increase in AB CIT rate in 2016 resulted in reduced wage income for an average worker in the long run by $416/year.

Finally, the BC NDP are proposing a housing speculation tax but since they only give it two sentences in their platform I have no idea what it is or means so…*shrugs*.

Overall

Look, there is a lot in the platform and you really should read it yourself. I know there is a lot of chatter from the Liberals as to whether the BC NDP platform is balanced. What I can say is that over the three year horizon, the plan appears to be fully costed and balanced. However, and this can be said of the BC Liberal platform as well, the BC NDP platform makes commitments beyond the platform that are not costed, but no it is not the $6.5B crater (*cough* fake news *cough*) the BC Liberals are making it out to be. The BC NDP could and should be much more transparent with the details, but there is no doomsday device hidden in this platform. Read it and see for yourself.

And since the BC Liberals want to go down that road, I note that they themselves promised a BC ferry loyalty program that they did not cost themselves. How many millions of dollars will that cost that is not built into their platform? How many billions of dollars will the elimination of the MSP premium that is promised cost (ahem, even if it is an opportunity cost?)? And do you know the difference between a tax credit and a tax deduction because your platform does not? If I lived in a glass house, I would not throw stones.

 

Saskatchewan municipalities vs. the province

On March 22, 2017 the Saskatchewan government tabled their latest budget. In the face of falling revenues from both natural resources and tax, the province had to make some hard choices. Many of these made the news (e.g. the increase in the PST), but one choice they made is only recently becoming a hot topic. In that budget, the Saskatchewan government announced that it was eliminating the grants in lieu of taxes paid to municipalities by SaskEnergy and SaskPower (it later capped the reduction). It also announced it would no longer fund libraries in Saskatoon and Regina.

SaskEnergy and SaskPower are provincial crown corporations. Because they are government entities they are exempt from paying taxes, including property taxes. However, government entities often provide what are called payments in lieu of taxes (PILT) in the spirit of fairness. After all, these government entities are ensconced in buildings  within municipal boundaries and place pressure on municipal infrastructure, so the payment endeavors to help offset these pressures.

PILTs are fairly common, at least historically, but have become increasingly disputed. PILTs are also often made “at the pleasure of the government” and not required. As a result, they can and have been reduced and eliminated. Some municipalities that are home to federal and provincial governments have, as a result, been increasingly moving charges from property tax bills (like those related to sewer and water) to user fees because while these government entities are exempt from paying taxes they are not exempt from paying user fees.

While the province does appear have the power to cancel these PILTs paid by these two crown corporations, the municipalities are indicating that they were not duly informed of this decision. The budget was March 22 and the cancelled payments were due April 1. There is some credence this notion that the municipalities were not duly informed given the two main impacted municipalities (Regina and Saskatoon) had already passed their budgets, which included the payments. The province disputes the lack of communication, but the province also did not make a call to the municipalities when their budgets were publicized. So while the move by the province appears to be legal, it certainly was not executed in a way to encourage positive intergovernmental relations. Indeed much of the discourse that has followed has been eerily similar to a parent scolding their child.

One item in clear dispute between these two levels of government is how these two municipalities should respond to a sudden ~$10-$11M annual reduction in revenues. In particular, the City of Regina, which appears harder hit that Saskatoon, has proposed severe cuts to services, including eliminating holiday transit service, closing libraries, a hiring freeze, user fee increases, and  an increase in the property tax mill rate to cover the shortfall.

The province, however, has balked at this, instead saying the city should pay for the shortfall from its ‘rainy day fund,’ launching a new bun fight between the City and the Province. See, like many cities, the City of Regina has a reserve fund. Reserve funds are very important to municipalities as they allow it to borrow at preferred rates, they are used to support longer-term financial plans, and they help achieve community goals. That is, they ensure that municipalities don’t have to incur large debts when taking on capital projects thereby keeping tax rates stable over a longer period of time.

The City of Regina’s reserve fund and its rules are established by by-law and its purpose is to smooth out its budgets. The reserve fund is actually comprised of operating reserves, deferred revenue, and utility reserves. While the reserve has more than $200M in it most of these funds either can’t be used for general purposes (they are derived from regulatory charges and user fees which must be solely used for cost recovery from the good, service, or right charged. I worry that the premier is not aware of this since similar restrictions are placed on these revenues at the provincial level. Perhaps he should read my groovy new book?) or have been earmarked and contractually committed to capital projects, including those pesky infrastructure projects partially funded by Ottawa or the province. In fact, only about $25M in the reserve appears to be unrestricted, sitting in the general fund reserve account.  And the current plan shows that fund being exhausted by 2020 (for what, that is not clear).

Ok, well it seems like there is perhaps some room to fund this year’s shortfall through a dip into the general fund reserve if there was a willingness to cancel whatever planned spending the general reserve fund was intended to support. But that only addresses 2017. There have been clear signals that the reduction in the PILT by SaskEnergy and SaskPower will continue and may be expanded. What then? There is not enough flexibility in the City’s general reserve fund to do much more than cover the 2017 shortfall, meaning that all that would do is postpone some very hard decisions. That is, the shortfall is now structural. Structural shortfalls should not be addressed through the use of one time funds because one time funds are not structural.

So if a lowly tax economist, with some knowledge of municipal finance I might add, can figure this out in an hour or two, why can’t the province? I imagine that politics is playing a role in the response. There is, after all, but one taxpayer. The province was able to reduce its tax increases by keeping the PILTs for its own purposes. To then just have the municipalities raise taxes, putting the blame at the feet of the province, raises attribution concerns. The province does not want to take responsibility for the municipal tax increases so pointing to the reserve fund attempts to redirect taxpayer ire back to the municipalities.

Overall, the position of either of these governments is not desirable and it does not help the situation when they don’t work together to address budgetary challenges. The City, I think, would be more amenable to using its general fund reserve this year if it knew what the provinces plan was for the future with respect to maintaining the PILT and to stick to that commitment. I also worry about some of the decisions that the City is making and worry some of the service reductions are being tabled solely for political reasons themselves. If I were there I would try to get much more clear details from the City and the province on these points.

 

 

BC Election and Liberal Platform

So the writ in the BC election has been dropped and the first party to release their full platform was the BC Liberal Party. They launched their platform on Monday April 10 at llam (well that was the intended time, but the reality was that it was not launched until actually 11:15am).

Not only was the launch late, but initially the BC Liberal Party only made the platform available on flipsnack (behold it here) and did not enable the download button. What did this mean? Anyone with poor internet connectivity was left starting at blank pages for several minutes each time they “turned the page.” It also meant that those interested in particular items could not do a quick word search to go to areas of interest. This might not be a big deal to some, but it was such a headache for those of us trying to provide some commentary on the platform that it pretty much became a running joke through my commentary, like this one.

Fortunately, the BC Liberal Party eventually tanked the flipsnack link and provided a direct link to their platform in PDF. It was still a glossy, full colour, bandwidth sucking document but easier to deal with.

NOTE TO POLITICAL PARTIES: 1. Don’t piss off the wonks

2. it is not that hard to make a low rez, low bandwidth version of your documents available to those with limited connectivity or bandwidth caps, like those experienced in rural and remote communities, and many indigenous communities.

Overall, the platform is a bit of “meh.” Most of the goodies included were either announced in the Budget or are simply changes that would take place anyway (like the indexation of thresholds for certain tax credits). In fact, the only big ticket item was the MSP premium reduction. But even that is disappointing because the BC Liberal Party chose a morass of an implementation plan. Want to achieve the same thing, with more transparency and better target read me here or Iglika Ivanova here. The punchline is we could in fact, for much lower administrative and compliance costs, simply move the MSP into the tax system and get bigger bang for our buck, which is exactly what the BC Green Party is proposing. So the proposal of reducing and working to eliminate the MSP premiums is good, but the BC Liberals get a fail on their implementation plan. (The BC NDP are proposing to  eliminate MSP all together but without their tax plan (yet), we don’t really know what it means).

Other items include a so-called interim tax “credit” for people living in ferry dependent communities. The “credit” will be in place until BC Ferries is able to design some sort of loyalty program for 2020. There is just so much here.

First, BC Ferries has been consulting Ferry fees for literally decades. There is no reason why BC Ferries can’t immediately implement a better aligned sets of fees on its ferries to address real and serious distributional concerns (including getting rid of the seniors discount).

Second, the BC Liberal Party can’t seem to get it right as to whether it is a tax credit or a tax deduction. Seriously, read the platform. It is called a credit once and a deduction all the other times. What is the difference? A lot. A tax deduction reduces taxable income. A tax credit reduces taxes owed. So the value of a tax deduction is dependent on your tax rate, whereas a tax credit is set to a fixed rate. In the case of this tax “credit” the BC Liberal Party sets the value at 25% so we know it is a tax credit and not a deduction. We also know that under the tax collection agreement with Ottawa, provinces can’t add tax deductions to the tax system as they must use the federal definition of taxable income. Now a little bit of very important detail is also missing from the platform: is this tax credit refundable or non-refundable and claimable by person or household? A refundable tax credit means that you’ll get the money back, nonrefundable means that you can only apply it to reduce your taxes owed to $0. So non-refundable tax credit have very little value to low income persons. In fact, according to the CRA tax filer statistics, 34% of BC tax filers have a non-taxable return. But allowing the tax credit to be claimed by the higher income person can partially offset that. Finally, in order to get the credit you have to be able to afford to take the ferry and hold onto your receipts for more than a year. All together this is still a credit that is only of value to higher income households. I also imagine the credit will not be as temporary as this platform alludes.

All together this tax credit strikes me as a pure electoral announceable that was not well planned or thought out. Worse, IMHO, is that the party that is touting themselves a fiscal stewards can’t get basic tax nomenclature right. Now that is embarrassing.

The platform also announces a host of other boutique tax credits, so boutiquey in nature they are completely embarrassing. Of course, once again, the platform does not indicate which are refundable and which are not, because, you know, details. But overall all these little tax credits only amount to about $35M in foregone tax revenues. But don’t forget most of that is going to higher income households. With this myriad of little tax credits there are three important things to remember. First, BC has to pay CRA to administer every single one of these tax credits. Second, these tax credits are promoted by the BC Liberals as a tax cut. That is just pure political BS. Say it with me: taxing everyone throughout the year only to give it back to a chosen few at tax time does not constitute a tax cut. You get all the distortions from the higher than necessary tax rates and little derived benefit from the tax credits. Third, not only do they not amount to much foregone revenue but they also do not amount to much for the individual tax payer. For example, the BC Child Fitness Tax Credit returns a whopping $28 to a household that claims the full amount and which owes taxes before the application of the non-refundable tax credit. Rather than have all these individual credits, at least the ones directed to families could simply be rolled up in the BC child tax benefit.

If you are interested in learning yourself about tax credits might I suggest this Neil Brooks piece. If you want the pro tax credit side of things, read this Ken Boessenkool piece.

One last specific item I will mention, the platform looks to cap tolls on two of the big bridges on the mainland. Blake Shaffer wrote a good piece over in Macleans about this here. (I might quibble with the language of user fees since road tolls are much more likely to meet the conditions of a regulatory charge, but that is for another day) I’ll add that the $500 cap means that it is cheaper to drive than take public transit, meaning there will be no incentive, as there currently is, to ditch the car in favour of public transit. As a result, be prepared for increased congestion. The NDP are proposing to eliminate these tolls all together, which will just make a bad situation worse. And where will the revenue for maintenance and replacement come from?

There is very little in this election platform to address some of the very important policy issues in BC today, not the least of which is affordability (housing, kids, life). This is an election platform of a party who will continue with the status quo. Of course, if you are benefiting from the status quo, you might like this. But I judge policy based on how it treats the more vulnerable members in society and there is little in here for that. Of course whether this platform is better or worse than the other parties remains to be seen.

BC Election & the NDP Rental Rebate

As you may or may not know, the writ has been dropped in the BC election and all week we’ve been getting details about each of the parties plans. The Liberal Party released their full platform (more on that separately) on Monday and (I think) the NDP will release theirs tomorrow on Thursday April 13.

The BC NDP though have been making small announcements here and there and today one really caught my eye.

I can’t find any more details that this but imagine the rebate is more about addressing affordability and disconnect in how ownership and rental is treated. We should learn more tomorrow to help with that side of the debate (please BC NDP don’t use flipsnack or similar to release your platform), [UPDATE: JOHN HORGAN HAS NOW BEEN QUOTED AS SAYING “If homeowners can have a homeowner grant, renters should be able to have a grant as well.” That is actually a very straightforward argument using the horizontal equity principle. Of course, we could instead get rid of the homeowner grant, but even then homeownership is hugely subsidized in this country.] but that aside for now if we are going to have such a rebate why would a tax economist be interested in this?

Yah, I am excited for completely different reasons. I have, in fact, been calling for recognition of rental payments in the tax system for the sole purpose of collecting information for compliance purposes.

We know anecdotally and from compliance audits that small suppliers are fairly poor with their reporting of rental income for tax purposes. There are several reasons for this, including lack of knowledge, fear (their suite is illegal so they think if they report the income they will be visited by by-law officers), and pure tax evasion. The pure tax evasion is not just related to the rental income itself but also related to improper claiming of the home owner grant and principal residence exemption. How much money is lost to such antics? We don’t know but recognition of rental payments through the income tax system could allow us to determine this. It could also extend beyond just tax compliance but also using the information to investigate compliance with rental laws (like rental increases, the ol’ I tell you that I am evicting you because my granny is moving in but really I want to increase the rent more than the legal requirement, etc.)

But this rebate would have to be implemented properly to achieve these multiple objectives. It would have to be delivered through the income tax system, which means it would have to be the form of a tax credit. I know, I know, economists including myself rail on about how ridiculous all these boutique tax credits are. But given the number of renters in BC, given that arguments can be made that the tax credit actually works to address horizontal equity issues between home owners and renters, and given the possibility of the tax credit to pay for itself through compliance efforts, well, I am fairly excited about the possibility (and launching a research agenda in a few years time). It would have to collect information on the address of the rental, how much total rent paid, and name and contact details for the landlord. And would have to be implemented in a way to also minimize fraudulent claims by people who are not actually renting.

So if the BC NDP win this election, that they follow my advice here:

Oh and as an aside, did you know that many provinces, including BC and Ontario, in the past had rental income tax credit?