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.

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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.

 

Taxes and the Olympics (Again!)

A few weeks ago, I sent out this following tweet:

I had to wait a bit longer then expected, but so it has begun. Yesterday I was interview for an article in the Globe about this exact issue and here is the article.

Of course my loyal readers know I have been writing about this for years now (well every two years that is) and here are several links to get you up to speed: here, here, and here.

If you prefer the bottom line, here it is:

  • If an Olympic medal contending athlete is not treating their income and expenses from being a medal contending competitive athlete (professional or amateur) as a business then they need to get themselves to a tax accountant pronto.
  • If an athlete is not using the tax advantage from the Amateur Athletic Trusts, then talk to CRA or your new wonderful tax accountant.
  • The fact that the prescribed prize exemption exists is repugnant, but regardless Olympic winnings do not qualify because prescribed prizes are only awarded to individuals who did not offer themselves up for competition but were nominated by an arm’s length body and because their efforts do not have a broad-based and tangible beneficial effect on the economy or the society. Warm glow does not qualify.
  • Just because Australia rewrote is tax code does not mean we need to. We have section 9 of the ITA and athletes should use it.

The issue of people wanting Olympic Winnings to be nontaxable is, IMHO, a solution in search of a problem that does not exist.

Now every time in the past I have written about this I get emails about how my weight precludes me from commenting on this issue. I don’t see the relationship so spare the efforts. You’ll just get deleted anyway and I really don’t care what you think about my weight.

 

 

 

Speculation and the BC PT surtax (PTST)

I have just written a piece for the Globe and Mail about the BC foreign buyer property transfer surtax. You can read it here.

I’ll add a few comments here. Many have pointed to the Ontario land speculation tax from the days of yore to argue that the BC PTST will be effective at deterring speculation. However, these are not similar taxes. The Ontario tax taxed capital gains realized on the disposition of real property that was not considered to be a principal residence. The BC tax instead taxes the transaction, the purchase of a residential property by foreign buyers, including principal residences. The former dissuades selling, the latter dissuades buying. While anecdotal stories suggest the capital gain tax was successful, the research tells a very difference tale.

There is no clear evidence that foreign buyers are the cause for the rise of housing prices in Vancouver. Examination of past bubbles in Vancouver, where foreign speculators were also blamed, show that the rise in house prices was due to speculation of all home buyers.

Speculators are very important players in markets. Why are noise or uninformed speculators not deterred by transactions taxes? Because they are not making decisions based on market fundamentals and are not deterred by price and market instability as informed speculators are. This clearly links to the previous paragraph.

The immense public support for the PTST is based on lack of knowledge and information not only on the problem, but also the impact of the solution. Policy should not be based solely on public opinion and it is unfortunate that BC politicians so eager to please in the run up to an election have allowed the policy agenda to be shaped in this way. I hope Ontario heeds these words.

 

Incentives are powerful

If you have ever studied economics, you will know that one of its calling cries is that people respond to incentives. Indeed you can even consider economics to be the study of how and why people respond to incentives.

Since public policy is concerned with guiding choices by putting in place incentives, you’d think policy makers would be more in tune with their implications. But policy makers often fail to consider how implementation of public policy can lead to perverse incentives.

An important function of implementation of public policy is to communicate the policy. Often this means making announcements long before the details of the policy initiative is determined. And sometimes just the act of making those announcements can lead to people responding to the policy.

I recently wrote about the unintended consequences of Canada’s expansion of parental leave here. But you might be interested in another feature of this expansion that gets at my point in the blog and is based on my research with Janice Compton on birth seasonality in Canada.

On 12 October 1999 the federal government signaled that it was going to expand the parental leave provisions, but made no commitment as to the date of that expansion. Instead, the expansion was official announced in the 2000 Budget on 20 February 2000 as being effective 31 December 2000. Why are those dates important? The table below shows the quarterly trend in observed births in Canada around this window.

Quarterly Observed Births, Canada, 1997-2004

Year January-March April-

Junea

July-Septemberb,c October-December c Total
1997       84,968         92,395         89,500       81,735       348,598
1998       83,424         90,464         88,881       79,649       342,418
1999       81,890         87,875         87,772       79,712       337,249
2000       82,627         86,801         83,173       75,281       327,882
2001       81,350         87,303         86,123       78,968       333,744
2002       79,345         83,719         86,618       79,120       328,802
2003       79,299         85,486         88,856       81,561       335,202
2004       81,583         85,762         87,992       81,735       337,072

Source: Modified from Compton and Tedds, 2016

The date of this Speech was October 1999 and if we use the median gestation period of 40 weeks this accords with July 2000, the beginning of the noted temporary decline in births in Canada. The actual commitment to this expansion was not made until the following Budget, which was announced in February 2000. Again, if we use the median gestation period of 40 weeks this accords with December 2000, the end of the noted temporary decline in births. December 2000 is also notable because the new expanded parental leave policy took effect on 31 December 2000.

While this is certainly not causal evidence, the correlation is notable and suggests that Canadian women responded significantly by curtailing conceptions in the wake of the policy signal. It is also interesting to note that we do not see an immediate spike in births following the policies implementation date, showing what many women already know: it is much easier to cease conceptions than it is to recommence them.

While such a short temporary drop in births may not be concerning, it is an interesting case of how policy announcements themselves can be incentivizing and why policy makers need to pay attention to how their vague policy signals may result in unintended behaviour. Indeed, as the data becomes available, it will be interesting to see if Canadian women had a similar response to the 2015 election announcements related to expanding parental leave from the current 35 weeks to 61 weeks.

 

 

Why we should care about National Infertility Awareness Week

You might not know this but in the U.S. this week marks National Infertility Awareness Week. It is a week to talk about infertility and assisted reproduction, among other topics. I have blogged a number of times about infertility and assisted reproduction and my last piece was a contribution to the Macleans ‘charts to watch‘ in the run up to Budget 2016.

One of my main messages on this topic is that Canada can’t continue to ignore assisted reproduction.

In Canada, the prevalence of infertility has risen from 5% in 1984 to upwards of 16% in 2010 (Bushnik et al 2012, p. 1). Increasingly, these infertile couples are seeking medical help, including turning to assisted reproduction technology (ART). The Canadian Fertility and Andrology Society (CFAS) reports that the number of assisted reproduction technology clinics in Canada increased by 50% between 2001 and 2012 (the latest year for which figures are available), and the number of ART cycles reported by these clinics increased by nearly 250% over the same time frame (Gunby and Daya 2005, and Gunby n.d.). Notably, in 2012 a total of 27,356 ART cycles were reported in Canada (Gunby n.d.).

Many people seem to associate infertility as solely being an issue of older women trying to conceive, but that is seriously uninformed view. The Canadian Fertility and Andrology Society produces regular statistics on assisted reproduction and according to their data only about 12.8% of ART cycles are due to ‘advanced maternal age.’ In contrast, 30% are due to male factor infertility, 13.2% due to a tubal factor, 9.3% due to Endometriosis, and 7.8% due to PCOS, among other exogenous factors. That is, there is an underlying health issue that necessitates the need for ART. Backing that up is that the majority of women accessing ART are under the age of 35. 

The Canada Health Act does not require the provinces to cover ART as part of their medical plans as the federal government has deemed that these procedures are not medically necessary (Hughes, 2010, para. 2). As a result, most provinces cover the cost of infertility testing, but few cover the costs associated with ART.

One of the biggest side effects of ART is the incidence on multiple births. The natural rate of multiple births is about 1 in 89 birth (~1.1%), whereas in the multiple birth rate in Canada has grown to about  1 in 30 (3.3%). Further, data from the Canadian Fertility and Andrology society shows that the multiple birth rate from in vitro fertilization treatments in Canada without regulated embryo limits was around 30%. Multiple births are both risky and costly, not only to the parents but also to the health care system and to the babies themselves. ART increases the multiple birth rate through either the transfer of multiple embryos through invitro fertilization or due to super ovulation during inter uterine insemination (IUI). Despite these concerns, only Quebec and most recently Ontario regulate embryo transfers (and no province regulates IUI).

34 years have passed since the birth of the first babies conceived through IVF in Canada and in that time the federal and provincial governments in Canada have collectively and individually shown little leadership with respect to infertility, assisted reproduction treatments, and the growing multiple birth rate in Canada.

The federal government particularly needs to reexamine the asinine and difficult to enforce limits on surrogacy and embryo and sperm donation. While some Canadians have moral difficulties with medical interventions in conception, the reality is that for many couples these interventions are both medically and mentally needed. These limits force Canadians to seek treatments in other countries, like the US, that do not have such limits or lead them to breaking the law. The limits also impede access to viable treatment alternatives, including for women unable to face the possibility of yet another miscarriage.

The issue of infertility, assisted reproduction treatments, and the growing incidence of multiple births needs a fulsome, mature, and national discussion in this country and the longer the federal and provincial governments ignore this significant reproductive issue, the costlier it will become.