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.

 

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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?

The 2017 B.C. Budget: The good, bad, and ugly

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.

Birth Trends in Canada: Old mums are not a new trend

On August 30, 2016 Macleans posted an article by Meagan Campell purporting that “And now, for the first time ever recorded in Canada, women aged 40 and older have surpassed teenagers in giving birth.” The article keeps getting reposted and shared and many are making comments about this ‘new’ trend of geriatric mums (this is the term used by the medical profession) giving birth.

Unfortunately, the claim is false and I really wish that Macleans would correct their article. This is not the first time ever recorded in the history of Canada that women aged 40 and older have surpassed teenagers in giving birth. In fact, older mums surpassed teens until just after WWII as detailed in this graph of historical births by age for Canada.

And as you can see from the graph the recent uptick in geriatric mums is still significantly below the rate that it was historically.

This fact that older mums is not a new trend should not be surprising. After all, how the hell do you think a women would be able to have 12 kids! I find it interesting the number of people criticizing this ‘new’ trend because the mum will be dead before their kid gets married, given that our life expectancy is now far higher than it was when we were doing this before. In fact, life expectancy increased from 57.1 years to 81.7 year over the period of 1921 to 2011.

The more interesting story is the fact that Canada has the highest average age of a first time mums, clocking in at over 30. And that those geriatric mums now giving birth are not giving birth to their 12 kid, but instead their first or second. That is the more interesting story, rather the reverting trend story.

 

Taxes and the difference between golf and hockey

I was contacted yesterday by Dale Smith with a media inquiry regarding an issue that, since 1971, has come up every few years. When these things come up, I am reminded that stupid tax decisions are gifts that just keep on giving.

Anyway, the inquiry was about a private members bill, Bill C-280, which is an act to amend the Income Tax Act related to golf expenses. Specifically, the proposal is to amend section 18(1)(l)(i) of the income tax act. Given that golf expenses do not even come up in the text of the amendment, it seemed to be causing a bit of confusion.

As I am sure you all understand, you can deduct legitimate expenses that your incur for the purposes of earning an income (section 18(1)(a)). That is, the expenses cannot be of a personal nature. Enter section 18 of the income tax act which details what deductions are NOT permitted from business income. Section 18(1)(l)(i) currently states

Use of recreational facilities and club dues

(l) an outlay or expense made or incurred by the taxpayer after 1971,

  • (i) for the use or maintenance of property that is a yacht, a camp, a lodge or a golf course or facility, unless the taxpayer made or incurred the outlay or expense in the ordinary course of the taxpayer’s business of providing the property for hire or reward, or

The proposed amendment wants to remove the bolded and underlined text above, making golf expenses deductible for tax purposes.

Yes, folks golf fees are not deductible for tax purposes. You can see right from the act that this inclusion dates back to 1971. After much discussion, it was decided that the powers that be that golf is purely a recreational activity. Even if you choose to conduct business as part of the activity, the activity itself is personal. That is, the business is ancillary to the activity. Much like if you and I went out for a run and while running we discussed income tax rules regarding deduction, nothing related to that run is deductible for tax purposes. Running is a personal activity.

OK, seem pretty clear, so what is the problem. Well, in a nutshell loopholes. As you know the income tax act is ripe with special ad hoc rules and those special ad hoc rules beget other special ad hoc rules. The income tax act, in section 67, acknowledges that some expenses can be both personal and business in nature. This includes meals and entertainment. Because of the dual purpose of these expenses, they are only partially (50%) deductible.

So now you see there is ripe for problems. What is a personal expenses vs a combined personal and business expense? Apparently tickets to sporting events, like hockey, are a partially deductible expense as are lift tickets, movie tickets and a host of other expenses. What is the difference between conducting business on the ski hill versus on the golf course? I have absolutely no idea. And there, my friends, is the problem.

But, to me, this is not a reason to make golf fees deductible and why we all need to be wary of special interest groups arguing for preferential tax treatment.. Instead, it is time to carefully and rationally revisit what is a combined personal and business expense and ensure that the expense is truly necessary for the conduct of business. I am not one who believes that all meals and entertainment should be eliminated, like some camps, but Holy Moly Ottawa, you need to be much smarter than this.

And since you have a very intelligent crew advising you already on stupid tax expenditures, might I suggest that you get them to talk to you about this one.

Ms. [enter name of female academic here] vs Prof. [enter name of male academic here]

Women in the academy will regale those who will listen about tales of students always referring to them as Ms. or, worse yet, Mrs., while blissfully referring to male counterparts as Prof. or Dr.

When these women academics, of which I am one, attempt to correct these students, well all hell breaks lose; we are accused as being uptight and egotistical, including by our male counterparts who are not so similarly afflicted.

The battle for respect for our credentials is not just relegated to the hallowed halls of the academic institution. As many of you know, I am regularly interviewed by the media and regularly see the same double standard applied.

Let me refer to the most recent incident. I was recently interview by the Globe and Mail [or should I say Male] for a story about the taxation of Olympic winnings here. You will  note I am referred to as Ms. Tedds in this article.

Now were I to complain to the Globe the answer will be that they don’t refer to academics as Dr. to avoid confusing us with medical doctors. I know this because I have, on several occasions in the past, complained.

Yet when a male colleague is interviewed by the Globe, they refer to him as Prof.

Here is an article where they interviewed Trevor Tombe and Mike Moffat and both are referred to as Prof.

Here is a more recent article where Josh Gordon was interviewed and referred to more often than not as Prof. Gordon.

Here is an article where Stephen Gordon was interviewed and referred to as, you guessed it, Prof. Gordon.

Here is an article where Kevin Milligan was interview and referred to as….Yup Prof.

And here is la piece de resistance, an article where I was interviewed and referred to a Ms. and the male academic interviewed referred to as, yup, Prof. In the exact same article! In fact, it was this article that started it all, and when I complained, Paul Waldie did not see the problem.

Now most of the academic dudes referenced in these articles are mostly dudes with which I am friendly. We run in the same circles and do a lot of the same work and commentary. I do not begrudge them at all. But I do begrudge the Globe and Mail for being completely inconsistent in their application of their apparent rule, which appears to be applied in very gender biased fashion.

When people tell me that gender equality is fully here and that there is no reason or rationale for feminism,  I cry bullshit. And I do so standing knee deep in gender bias bull shit. Gender bias continues to permeate our culture, and it does so sometimes in subtle ways.