Today was Budget day in BC and courtesy of the CBC I was able to participate in the budget lock up. This required me to be at the lock up for 8am PT, which is the equivalent of 5am academic time. Over the course of the morning I was able to meet it up with fellow policy wonks and always fun to have good chin wags about various policy items and catch up on academic gossip.
Three other observations from the day: unlike in Ottawa, those of us in lock up were fed and watered which is a nice touch (nothing fancy, but enough to keep you going); the room was mostly filled with white men in blue suits; and, given the vibrations from the pockets and purses of many of those in the room, many failed to check in their mobile devices as required by the rules.
As for the budget itself, it was an interesting read and, as always, the Budget includes the good, the bad, and the ugly, at least from the perspective of a tax economist. Here I will focus on some of the larger items on both the corporate income tax side and then the personal income tax side.
There are several key announcements on the corporate side of things, and one musing. Before I get to that, as a reminder the BC Tax Competitiveness Commission tabled its report in November 2016. The Commission made a number of recommendations, one of which was acted on in this budget and two of which were ignored.
The PST was found by the Commission to have the greatest negative effects in terms of the incentive to invest, operating costs and economic efficiency. With this in mind:
- The Commission recommended that PST be eliminated on a number of purchases by businesses: electricity, other energy, software, and telecom. The government acted on the advice to exempt electricity from the PST, but not the other items. The rationale is that the PST on electricity in BC is fairly unique and impacts trade-exposed and energy intensive businesses. The other recommended exemptions, the intent of which were to improve productivity and competitiveness were not acted on in this budget, but the budget does “…acknowledge that further improvements to the PST…will be considered in the context of the province’s fiscal situation and competing funding priorities.” (p. 74)
- The Commission also recommended that the province get rid of the provincial retail sales tax (PST) and in lieu implement a made-in-BC value added tax. Unsurprisingly, given the fairly recent experience with the move to and then from a Harmonized value added tax, the government did not act on this recommendation. But the government “endorses the Commissions recommendations for the broad public consultation and engagement with British Columbians prior to considering any substantive changes to the PST.” (p. 74) So what this means is unclear, but British Columbians should prepare themselves for another conversation on either harmonization with the GST or its own unique version of the GST. I hope this time we have a more logical, less emotional discussion about this topic because moving to a VAT and away from the PST has significant economic benefits for the province.
The Commission also noted that the Corporate income tax has a much less effect on business competitiveness and economic performance than the PST. The commission noted that the government has indicated that it was interested in pursuing reduction in the corporate income tax rate. The commission also noted that reducing the general corporate tax rate is not nearly as effective in encourage business investment as reducing the PST on machinery and equipment. Further, the Commission was clear in its disdain for further cuts to the small business rate. There is no evidence that the small business rate encourages businesses to grow or addresses issues related to access to capital. Instead, the small business rate leads to disincentive to grow or inefficient business structures to reap the benefit form the low rate Further, there is growing evidence that the small business rate incents professional to incorporate solely for the purposes of a tax shelter. Despite this clear evidence and recommendation, the BC opted to reduce the small business rate from 2.5% to 2.0%. This policy based solely on politics and vote buying then on sound evidence with clear economic benefits.
On a side note, the BC government also announced extensions to various businesses tax credits that piggy back on federal tax credits, including the SR&ED tax credit and the Mineral Exploration Tax Credit. I guess these extensions are fair. We know that Ottawa has already signaled that it is considered these tax credits, with the eye to elimination or modification so it is prudent for the province to wait out the federal government so as to make better decisions once federal action is known. That is, these business tax credits need to be addressed more broadly and with the federal government and its fellow provinces.
On the personal income tax side, by far the most significant announcement relates to the Medical Services Premium (MSP). As you may know, BC is the only province with a stand-alone health premium. It has been regularly panned, but this government has previously indicated that the premium is necessary to ensure that users directly pay a portion for their health care as a way to reduce usage. But the BC government also last week stated that it was time to give back to taxpayers. While everyone else was betting on a PST reduction, not me, my money was on something related to the MSP. The end result is a reduction to MSP premiums for some and a commitment to eliminate the MSP premium completely.
What is announced is that the threshold to qualify for full premium assistance is raised by $2,000 to either $26,000 for singles or $35,000 for couples and a 50% reduction in premiums for those whose family next income is under $120,000. Those earning over $120,000 will continue to pay the full premium. This sounds fairly straight forward, but the devil, as I always say is in the implementation details which makes this transitional period a complete administrative morass. First, in order to qualify for the reduction, individuals who pay their premium directly will have to directly apply to the government. This places a large burden on individuals that we already know do not rightfully apply for assistance. Recent evidence indicates that 26% of those who qualify for premium assistance don’t apply for it and now we are expanding the pool. It is the government’s onus to ensure that taxpayers obtain the tax benefits owed to them and this includes the MSP. This system put the onus on the taxpayer and leads to increased administrative costs and reduce compliance. Hmmm, if only we already had an administrative data base of BC taxpayers that already included the full details of the household composition and structure (note the sarcasm, because we do, it’s called the income tax system).
Second, those individuals whose employer pays the premium on their behalf, in whole are in part, are expected to work with their group plan administrator to ensure they benefit for the reduction. This is an extraordinary burden to place on employers and their group plan administrators. Employers do not have information on an employees net household taxable income and employees should not have to provide this information to their employers.
Bottom line is that while reducing and moving to eliminate the MSP is good public policy, the implementation gets a failing grade. I’d expect much more from a supposedly sophisticated government. The plan could have easily already been incorporate into the tax system, overcoming all these administrative and compliance problems. And given that the government is booking MSP premiums through the planning horizon it is not clear when they plan to deal with this substantial problem.
Finally, the BC government, in what is becoming a common activity, announced several boutique tax credits running up to the election. It is clear that their main policy advisors are former advisors for the Harper government. I mean, it is great they got jobs, but their policy ideas in this area just stink. The new tax credits include:
- An add on to the federal Volunteer Firefighters and Search and Rescue tax credit. This is a nonrefundable tax credit, meaning that if you apply for the tax credit but your tax is already reduced to $0 before the credit is applied you receive $0. It is also announced as a $3000 tax credit but its tax value is only 5.06% of that, or $151. There is no evidence of this tax credit being at all effective and a much better investment on the part of the government would have been to provide the funds directly to organizations for direct purchases of training, equipment and payroll for these individuals. Also, under the results of the federal tax expenditure review which are expected to be announced in the upcoming federal budget, it is expected that this tax credit at the federal level may be eliminated if so then the province will have to pay the administrative costs of the tax credit.
- The government also announced (in September) a back to school tax credit. As with the above, it is a nonrefundable tax credit, meaning that if you apply for the tax credit but your tax is already reduced to $0 before the credit is applied you receive $0. It is also worth a maximum of $12.65 per child. I cannot imagine the administrative and compliance costs are less then the benefits from this thing, making it a terrible piece of policy. A much better way to deliver support to families with school aged children would have been enrich the BC Early Childhood Tax Benefit which is a refundable tax credit geared to income.
So there you go, the good, bad, and ugly of some of key tax items in the BC budget. Overall, it is disappointing to see this government so poorly design and implement tax policy. I offer my services and advice since you so clearly need them, but I shan’t sit around waiting for the phone to ring.