SUPPORTING THE CAR INDUSTRY IN BC WITH FLEXIBILITY AND TAX REFORM (2024)

Issue

The new car industry in British Columbia is at a pivotal juncture, grappling with the dual challenges of evolving consumer demands and the swift transition towards zero-emission vehicles (ZEVs). The industry, a significant economic driver, faces hurdles including continued supply chain issues, navigating technological and consumer changes, and a luxury tax regime that inadvertently penalizes a broad spectrum of consumers. These factors, coupled with ambitious ZEV targets set by the Provincial Government, have placed considerable strain on both car dealers and consumers, necessitating a thoughtful re-evaluation of current policies.

Background

The new car industry in BC is an important part of the provincial economy, generating $17 billion in retail activity and supporting almost 30,000 full-time equivalent jobs, 19,000 of those directly. The industry generates $286 million in direct tax revenue and $775 million in total tax revenue for all three levels of government, which includes $489 million of spin-off or indirect tax revenues throughout the supply chain.[1]

However, several provincial policies challenge the industry's resilience and could present barriers to its future success.

BC’s “Luxury Tax”

BC levies increased PST on new vehicles as a form of “luxury tax,” starting at a purchase price of $55,000. This threshold has not been adjusted for inflation for several years, as reflected by the fact that the average price for a vehicle in Canada now exceeds $61,000. It encompasses vehicles essential for many BC families and businesses that are by no means luxury items.

The enhanced PST levied on that $61,000 average sale is 10%, representing an additional $1830 in ‘luxury’ taxes.

With over 40% of all new car sales priced at $55,000 or higher, this increased tax exacerbates the financial burden on consumers in an already high cost-of-living environment, and puts BC new car dealers at a competitive disadvantage. Further, with the introduction of the federal Luxury Tax on vehicles over $100,000, there are cases of “double taxation” impacting many sales that get taxed under both regimes.

Increasing the thresholds for this increased PST to levels more commonly associated with “luxury,” such as the federal $100,000 level, and then linking that to the BC Consumer Price Index to increase along with inflation would be a welcome first step toward repealing the provincial “luxury” tax altogether and help alleviate undue financial pressure on consumers.

BC’s ZEV Mandate

In late 2023, the BC government moved up its mandated timeline for transitioning new vehicle sales to 100% zero-emission vehicles (ZEV) by five years. As a result, BC now requires all new light-duty vehicles sold in the province to be ZEVs by 2035. More immediately, the industry must meet a target of 26% by 2026 and fully 90% by 2030, just six years away.

Despite industry efforts, reaching 90% by 2030 poses a significant challenge for the industry. Failure to do so risks penalties for dealers, restricts consumer choice, and potentially increases vehicle prices.

The present cost of zero-emission vehicles is higher than traditional vehicles, creating an affordability issue for many consumers, even with current incentives (some of which have now added an income-tested phase-out to zero.) in addition, supply issues that first arose during the pandemic are still affecting the industry, and a continued lack of an adequate charging network works to undermine consumer confidence, particularly in areas outside of the Lower Mainland.

This softening of consumer demand is being reflected in a plethora of recent announcements by auto manufacturers of curtailed ZEV production in both the United States and Canada and lower expected sales: Ford is pushing back a $3.5 billion battery plant in Michigan, and delaying its Ontario EV plant as well; Volvo is cutting funding to EV-maker Polestar; Toyota suggests hybrids not ZEVs are the future; and Tesla has warned of lower sales in 2024 and has cut production as well.

These challenges put new car dealers at risk due to the penalty regime that accompanies the ZEV legislation, which includes a $20,000 fine for each internal combustion engine vehicle sold over the allowable amount. If the manufacturers are having challenges with consumer demand and are curtailing production, there is little that local new car dealers in communities across BC can do to overcome that, yet they will be negatively impacted by BC’s ZEV regulations.

This could also impact consumers by limiting the selection of vehicles available for purchase. If a dealer or supplier is at risk of not reaching their EV sales goal, they may be forced to prevent sales of non-EV vehicles to ensure they reach the appropriate EV to non-EV ratio, putting artificial supply constraints on vehicles—thereby reducing consumer choice, raising prices, and harming both consumers and car dealers.

Along with the accelerated timeline noted above, the Provincial Government has added more funding to the Go Electric EV Charger Rebate Program for homes, workplaces and multi-unit residential buildings, acknowledging that the program’s funds were exhausted earlier in the year due to higher-than-anticipated demand. This illustrates that a larger, consistent and predictable level of funding is needed to create a network of charging access to underpin the shift to zero-emission vehicles and avoid scenarios where incentive programs close down early due to lack of funding.

THE CHAMBER RECOMMENDS

That the Provincial Government:

1. Raise the ‘luxury’ PST tax threshold on new vehicles to a higher level -- at least in line with the federal luxury tax of $100,000 – to reflect inflation and current market realities and peg that threshold to inflation through regular increases tied to the annual BC CPI index.
2. Consult with the new car industry to assess the feasibility of current ZEV sales targets and the associated penalty regime and explore potential flexibility in their application of the legislated targets. Consideration should be given to the industry's capacity to meet these targets without adversely affecting consumer choice and affordability.
3. Commit to a larger, ongoing investment commitment to expand the EV charging network, especially in underserved regions, a crucial step to making ZEVs a viable option for a broader segment of the population.