CHANGING BC’S SALES TAX MODEL – MOVING BEYOND THE PST (2022)
BC’s tax competitiveness is seriously undermined by the antiquated Provincial Sale Tax. As a small, open trading jurisdiction this cannot be left unaddressed if BC wishes to advance itself as a competitive jurisdiction in our post-pandemic recovery.
Background
A value added tax is common throughout the world and highly relevant to goods and services taxes and should be considered as important aspects of our future, innovative economy, particularly when it relates to our competitive advantage and productivity.
Successive Provincial Governments have tried to keep taxes competitive for both individuals and business.
Table 1 - Interprovincial Comparisons of Business Tax Rates
As shown in Table 1, BC does remain relatively competitive in a Canadian context across a range of key business tax rates. It must be noted that these rates are focused on established businesses generating revenue or making sales (except for sales tax which in BC, Manitoba and Saskatchewan is paid on business inputs). Future economic growth in BC will depend upon our ability to attract investment and new economic activity. If investment and new economic activity are the goal, BC’s tax picture looks very different.
To understand, BC’s taxation landscape, as it relates to new investment. it is necessary to review BC’s Marginal Effective Tax Rate (METR)[1].
Table 2 - METR Rates by Province 2012[2], 2014[3] &2017[4]
In 2012, BC was the 6th most competitive jurisdiction in Canada and well placed against our western neighbours and in relation to Ontario – in short against our competing jurisdictions. By contrast in 2014, we saw BC move to the bottom of the Canadian ranking. This difference is due to the fact that British Columbia – like Saskatchewan and Manitoba – “continues to levy the retail sales tax, which results in a significant tax on capital investments .”[5] In 2017, BC’s METR declined a little further, which – combined with an improvement of Manitoba’s METR – has resulted in BC being last among all the provinces.
It's worth noting, the above METR calculations do not capture the full impact of the PST on BC competitiveness. This measurement only takes into account 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 regarding BC’s critical export industries – a key component to any lasting, sustainable recovery. As a jurisdiction, BC has a smaller export base than similar-sized provinces (i.e. Ontario, Quebec, Alberta), it is critical that attention is paid to how tax changes can positively (or negatively) influence BC’s exporters ability to compete in other markets. BC’s PST is a significant impediment in this regard.
As a small, open trading jurisdiction, BC exporters compete with producers from across the globe, the majority of whom 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 BC stands relatively alone as one of only 3 jurisdictions in Canada that do not have a value-added sales tax in place. This makes BC the exception to the more than 130 countries worldwide that do have a value added tax. As such, these producers have a significant competitive advantage over BC producers who endeavor to remain competitive by building these costs into their price. A VAT would also make BC producers more competitive against foreign competition who are selling in the domestic market for the same reason.
This is also an issue for many of BC’s resource industries that are important to the prosperity of many 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 in turn reduces profits and, therefore, the ability of these companies to invest in innovation and further job creation.
The Productivity Imperative
The single biggest determinant of our per capita income and our ability to raise wages and living standards for workers 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 has not fared well to other international jurisdictions.[6] In BC, our province has experienced faster productivity growth vis-à-vis the national average to the point we are among the top four provinces. It should be noted though that BC is significantly behind the top three provinces. Furthermore, BC lags of productivity in its business sector (the total economy less government services and non-profit institutions serving households),[7] so a move to a made-in-BC VAT can provide an added boost to our province’s productivity going forward.
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 BC’s productivity performance is reason enough to look to government to find ways to boost investment in technology and equipment, the Chamber believes the ongoing demographic shift continues to make this the highest of priorities for government.
We know that the baby boomer generation continues to age and transition to retirement. While older workers have been encouraged to remain in the workforce longer, we can anticipate close to 640,000 workers will need to be replaced between 2021-2031. During this same period, BC can expect to create 29,000-36,000 new job openings through economic growth over the next decade, while there will be new entrants to the workforce, this expected job creation will only help fill 48% of these positions every year.[8] This represents a shortfall of 449,000 positions with no workers to fill them.
While interprovincial migration and immigration will go a long way to make up that shortfall, we need to use multiple tools to ensure this challenge does not impact future economic growth and slow recovery of the BC economy. To do so, we must improve our productivity levels, and a VAT is a key instrument in the toolbox.
The Importance to Small Business
While many of the arguments in favour of a value added tax focus on its broad provincial impact, this is an issue of particular importance for small business given the strength of BC’s small and medium sized businesses for our economic prosperity.
BC’s small business sector is critical to wealth generation and our capacity to grow and innovate. Employing over one million British Columbians, small business is responsible for 43% of all private sector employment in the province in 2020.[9] This overall number is lower in 2020 due to the pandemic, and will likely increase in following reports, but government help can accelerate the growth of BC small businesses by switch to a made-in-BC value added tax that allows businesses to reinvest in their business and employee via more productive equipment and technology, which in turn supports even higher wages for workers.
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 value generators. Small businesses shipped approximately $15 billion worth of goods to international destinations in 2020, comprising around 36% of the total value of goods exported from the province.[10]
This places small business, especially those exporting and given the challenges facing our businesses on the global stage as outline above, as one of the key beneficiaries of a VAT. In fact, one of BC’s largest productivity challenges is the difficulty small businesses face in accessing capital to invest in innovation or productivity enhancements. As such, the current PST has a disproportionate impact on these small businesses compared to larger firms in terms of addressing productivity.
The Solution
The competitive and productivity issues that we have outlined above were an issue. Indeed, so many business organizations support the introduction of a VAT because it addresses many of these issues.
Reform is needed – now more than ever. As we have demonstrated, the PST has a significant impact on BC’s competitiveness and productivity. The Chamber realizes there is little desire for significant reform to our sales tax system. Over the long term, though, government should engage with British Columbians on our competitiveness and productivity and the role taxation plays coming out of the pandemic to be competitive in the future.
The Chamber believes that the most damaging aspect of the PST and the aspect that therefore requires ongoing attention is the PST being levied on investment in machinery and equipment. This is not to suggest that the PST is an increase in cost on all machinery and equipment as the PST is already exempt on certain machinery and processing equipment used in manufacturing and agriculture. And credit to the BC government for implementing PST rebates on those remaining items of machinery and equipment in response to the pandemic. This temporary reform needs to be made permanent so all sectors can access these savings and reduce BC’s METR until a made-in-BC VAT can be implemented.
Indeed, the Expert Panel on Tax estimates that offering an Input Tax Credit/Rebate on the acquisition of machinery and equipment would cut BC’s METR to 19%, significantly improving BC position in the Canadian context[11]
The Chamber recognizes that this measure will come at a cost to the treasury. The Expert panel on Tax estimates this measure alone would result in a reduction in revenue to government in the order of approximately $500 million back in 2016/17.[12] While we would expect a similar result today, this change is going a long way to support BC businesses in their pandemic recovery efforts.
The PST represents a cost of $1.5 billion, while BC businesses are also facing rising costs on several additional fronts. Business is facing higher payroll taxes (such as the Employer Health Tax) and WorkSafeBC premiums, an increasing carbon tax, 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 sectors, the ongoing regulatory impediments facing business at every level, and the necessary added costs to combat the pandemic. A forward-thinking shift in tax policy away from the PST to a made-in-BC value added tax is the kind of game-changing decision government can make to spur innovation and lasting growth in our businesses and economy, that contribute to a high standard of living for all British Columbians
THE CHAMBER RECOMMENDS
That the Provincial Government:
- Make permanent a fully refundable investment tax credit or rebate 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, until a made-in-BC value added tax is implemented;
- Continue to work with the chambers of commerce and others to find ways to reduce the administrative burden of the PST; and
- Develop a made-in-BC Value Added Sales Tax system to enhance BC’s competitiveness and productivity.
[1] 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.
[2] 2012 Annual Global Tax Competitiveness Ranking, Duanjie Chen and Jack Mintz, pages 15 & 16. http://www.policyschool.ucalgary.ca/sites/default/files/research/tax-competitiveness-2012.pdf
[3] 2014 Annual Global Tax Competitiveness Ranking, Duanjie Chen and Jack Mintz, pages 12 & 13. http://www.policyschool.ca/wpcontent/uploads/2016/03/Tax-Competitiveness-Chen-Mintz.pdf
[4] 2017 Tax Competitiveness Report: The Calm Before the Storm, Philip Bazel, Jack Mintz, and Austin Thompson, page 16. https://www.policyschool.ca/wp-content/uploads/2018/02/2017-Tax-Competitiveness-Bazel-Mintz-Thompson-final.pdf
[5] 2014 Annual Global Tax Competitiveness Ranking, Duanjie Chen and Jack Mintz, pages 11. http://www.policyschool.ucalgary.ca/sites/default/files/research/tax-competitiveness-chen-mintz.pdf
[6] https://bcbc.com/insights-and-opinions/canada-lags-peer-nations-on-raising-living-standards-over-time
[7] https://bcbc.com/insights-and-opinions/b-c-has-mostly-caught-up-with-canada-on-productivity-levels#:~:text=B.C.'s%20faster%20productivity%20growth,per%20hour%20worked%2C%20on%20average.
[8] https://www.workbc.ca/getmedia/c43af36f-f408-4990-9ae1-c5b5f5f7be7a/BC_Labour_Market_Outlook_2021_9MB.pdf.aspx page 8-9
[9] https://www2.gov.bc.ca/assets/gov/employment-business-and-economic-development/business-management/small-business/sb_profile.pdf
[10] https://www2.gov.bc.ca/assets/gov/employment-business-and-economic-development/business-management/small-business/sb_profile.pdf page 52
[11] Expert Panel on Tax Report, Table 7
[12] The Panel does estimates that this would be offset by higher economic growth that would increase revenue by $12, $50 and $115 million in the period 2014-2017