Changing B.C.'s Sales Tax Model - Moving Beyond the PST
B.C.’s tax competitiveness continues to be seriously undermined by the rejection of the value-added Harmonized Sales Tax (HST). This was only compounded by the fact that the HST has been replaced with essentially an unchanged Provincial Sales Tax (PST). As a small, open trading jurisdiction this cannot be left unaddressed forever if B.C. wishes to remain competitive as a jurisdiction.
The move to an HST was greeted with wide support from the business community and virtually unanimous support from academics. This support was based on a recognition that the HST would result in increased competitiveness; increased productivity; harmonization with most of the Canadian and global economy; stable government revenue and a reduction in paperwork for business.
Of these many positive aspects of the HST, the two that are most important to our ongoing economic prosperity are competitiveness and productivity.
The Competitiveness Challenge
Since 2001, the provincial government has undertaken a sustained program of tax reductions for both individuals and business.
As shown in Table 1, B.C. is highly competitive today in a Canadian context across a range of key business tax rates. It must be noted, however, that these rates are focused on established businesses generating revenue or making sales (with the exception of sales tax which in B.C., Manitoba and Saskatchewan is paid on business inputs). B.C.’s economic future will depend upon our ability to attract investment and new economic activity. If investment and new economic activity are the goal, B.C.’s tax picture looks very different. To review B.C.’s tax picture, as it relates to new investment, it is necessary to review B.C.’s Marginal Effective Tax Rate (METR)
As we can see from table 2, in 2012 under the HST, B.C. was placed as the 6th most competitive jurisdiction in Canada and well placed against our western neighbours and in relation to Ontario and Canada – in short against our competing jurisdictions. By contrast in 2014, we see B.C. move to be the bottom of the Canadian ranking. This difference is due to the fact that British Columbia, like Saskatchewan and Manitoba, “continue to levy the retail sales tax, which results in a significant tax on capital investments (other provinces have harmonized their sales tax with the federal GST, and Alberta has no sales tax, so capital taxation is less severe).”
It must be noted, the METR calculations do not capture the full impact of the PST on B.C. competitiveness. They take into account only the PST on capital investment. The PST also applies to non-capital inputs that are used in business operations. In fact, the PST paid on non-capital inputs is four to five times the amount levied on capital inputs.
The other aspect of competitiveness is in regards to B.C.’s critical export industries. As a jurisdiction, B.C. has a smaller export base than most other provinces, as such it is critical that attention is paid to any tax changes that will negatively impact B.C. exporters ability to compete in other markets. The PST is a significant impediment in this regard.
As a small, open trading jurisdiction B.C. exporters compete with producers from across the globe, the majority of who do not have a sales tax structure that embeds costs at every stage of production as does the PST. Indeed, if we look at jurisdictions that levy a PST system, we see that B.C. stands relatively alone as one of only 3 jurisdictions in Canada, and the exception to the more than 130 countries worldwide, that do not have a value-added sales tax in place. As such, these producers have a significant competitive advantage over B.C. producers who struggle to remain competitive when building these costs into their price (HST also made B.C. producers more competitive against foreign competition when selling in domestic market for the same reason).
This is also an issue for B.C.’s resource industries, the foundation of economy prosperity for communities across the province. Commodity based exporters are price-takers in the global context. PST represents a significant cost for the extraction and production of resources and reduces profits and therefore the ability of these companies to invest in innovation and job creation.
The Productivity Imperative
The single biggest determinant of our per capita income and our ability to raise wages and living standards is our productivity – in short how efficient we are as an economy. Countries that are innovative and able to adapt to shifts in the global economy will see high productivity and thus a superior standard of living.
In this regard, Canada and B.C. have not fared well against competing jurisdictions. Between 1997 and 2011 the output of B.C.’s business sector was on average only 92% of Canada’s. From 1981 to 2007 non-residential business investment in B.C. was 74.4% of the Canadian average. In the same period the capital employed per worker fell from 113.5% to 88.9% of the Canadian average. It is not surprising that during the same period the B.C. share of Canadian GDP fell from 13.1% to 12.4%.
While there are a variety of factors that contribute to enhancing productivity, it is recognized that improvements will require investment in equipment and technology, particularly investments in information and computer technology.
While B.C.’s productivity performance is reason enough for government to find ways to boost investment in technology and equipment, the Chamber believes the coming demographic shift must make this the highest of priorities for government.
We already know that the baby boomer generation is on the verge of retiring. While older workers are more encouraged to remain in the workforce, we can anticipate that between 2014-2024 we will see 640,000 workers leave the workforce through retirement. During that same time, B.C. can expect to create 295,000 new job openings through economic growth while there will only be 421,000 new entrants to the workforce to fill these positions. That represents a shortfall of over 514,000 positions that will need workers to fill them.
To ensure this challenge does not profoundly damage the B.C. economy, we must ensure that we improve significantly on our productivity levels.
The Importance to Small Business
While many of the arguments in favour of the HST focus on its broad provincial impact, it is worth noting that this is an issue of particular importance for small business given B.C.’s reliance on small and medium sized businesses for our economic prosperity.
Further to this, B.C.’s small business sector is critical to wealth generation and our capacity to grow and innovate. Responsible for employing over one million British Columbians, small business is responsible for 54% of all private sector employment in the province.
While the concentration of small businesses largely reflects the economy at large with a significant focus on service sector industries, small businesses are significant economic generators. Small businesses were responsible for shipping approximately $11 billion worth of merchandise to international destinations in 2013, comprising over 33 per cent of the total value of goods exported from the province.
In addition, small businesses drive B.C.’s innovation industries with 8,462 small businesses in British Columbia’s high tech sector in 2011, which represents about 97 per cent of all high technology businesses.
This placed small business as one of the key beneficiaries of the HST and sees them significantly impacted by the return to the PST. In fact, one of the largest productivity challenges facing B.C. is the difficulty small businesses face in accessing capital to invest in innovation or productivity enhancements. As such, the return to the PST has a disproportionate impact on these small businesses compared to larger firms in terms of addressing productivity.
The competitive and productivity issues that we have outlined above were an issue before the introduction of the HST. Indeed, the HST was supported by so many business organizations specifically because of its ability to address many of these issues.
Despite the obvious benefits of a HST, the Chamber recognizes that the public has spoken through the referendum 2011: there is no appetite either publicly or politically for a harmonized sales tax.
However, reform is needed. As we have demonstrated, the return to the PST has a significant impact on B.C.’s competitiveness and productivity. The Chamber realizes that following the HST and the referendum there was little appetite of significant reform to our sales tax system and little appetite for a redistribution of the current tax which reduces the fiscal flexibility open to government.
The Chamber believes that the most damaging aspect of the return to the PST and the aspect that, therefore, requires the most immediate attention is that the PST is levied on investment in machinery and equipment. This is not to suggest that the PST equals an increase in cost on all machinery and equipment. The PST already exempts certain machinery and processing equipment used in manufacturing and agriculture. Reform needs to widen the scope of sectors that can access these savings to reduce complexity, but also to reduce B.C.’s METR. Indeed, the Expert Panel on Tax estimates that offering an Input Tax Credit on the acquisition of machinery and equipment would cut B.C.’s METR to 19%, significantly improving B.C. position in the Canadian context.
The Chamber recognizes that this is not a measure that can be introduced immediately. The Expert Panel on Tax estimates that this measure alone would result in a reduction in revenue to government in the order of $489 million in 2014/15 rising to $511 million in 2015/16 and to $534 million in 2016/17.
Over the long term, though, government must engage in a meaningful consultation with British Columbians on our competitiveness and productivity and the role taxation plays. A key component of this dialogue must be the role taxation plays in enhancing our competitiveness and productivity.
While the return to the PST represented the largest tax increase on business in B.C.’s history, representing an increase in cost of $1.5 billion, B.C. businesses are facing rising costs on a number of additional fronts. Business is also facing higher Employment Insurance and WorkSafe BC premiums, a carbon tax that is the highest in North America, substantial increases in the minimum wage, and uncompetitive municipal property taxes. This direct hit on companies’ revenue is amplified by the ongoing permitting issues that continue to impede investment in our critical resource sector and the ongoing regulatory impediments facing business at every level.
THE CHAMBER RECOMMENDS:
That the Provincial Government:
Provide a fully refundable investment tax credit claimed on businesses’ income tax returns equal to the PST paid on all acquisitions of machinery and equipment (including computers and software) but excluding buildings and structures with a capital cost allowance rate of 5 per cent or less;
Continue to work with the chamber of commerce and others to find ways to reduce the administrative burden of the PST; and
Commit to a dialogue with British Columbians on the development of a made-in-B.C. Value Added Sales Tax system to enhance B.C.’s competitiveness and productivity.
 METR is a measure used to compare the total tax burden on new investment by industry, type of investment, and size of firm. To do this METR includes the effect of corporate tax rates, sales tax on business inputs, investment tax credits and other incentives, capital cost allowances, capital taxes and the ability to deduct interest costs.
 2014 Annual Global Tax Competitiveness Ranking, Duanjie Chen and Jack Mintz, pages 12 & 13. http://www.policyschool.ucalgary.ca/sites/default/files/research/tax-competitiveness-chen-mintz.pdf
 ibid, page 11
 Stats Canada table 383-0011
 Investment in BC: Current Realities and the Way Forwards, Centre for the Study of Living Standards
 2015 Small Business Profile, BC Stats pg. 3
 Expert Panel on Tax Report, Table 7