B.C. Business Matters:
Jock Finlayson >>
Advice to the New BC Government: Tread Carefully on Business Taxes
In an era of political populism, it is not hard to understand why many elected representatives would consider hiking taxes on business as part of an overall fiscal strategy to manage budgets and pay for the services demanded by citizens. Of note, the NDP government that assumed office in BC in mid-July ran on a platform that promised to increase the income tax on business profits. If implemented, this would take the basic provincial corporate tax rate from 11% to 12%. (Small businesses are taxed at a much lower rate.) Firms operating in BC also face the statutory federal corporate tax rate of 15%. So the combined federal-provincial tax rate on business income would stand at 27%, once the New Democrats have acted on their election pledge.
While this certainly isn’t the end of the world for business in the province, it is worth thinking about the wider economic consequences of business tax policy in a small jurisdiction like BC. As appealing as it may be to advocate higher taxes on companies and entrepreneurs, there are some risks in following this path.
For one thing, a large body of economic research finds that a significant portion of the corporate income tax burden is actually borne by workers – it is a mistake to assume that it all falls on the shoulders of companies and their owners. Some studies suggest that as much as 50-60% of the “incidence” of corporate tax is shifted to labour (i.e., company employees), in the form of lower wages and salaries and reduced benefits. Why would this be the case? The primary reason is that higher corporate taxes depress rates of return on capital, making BC a less appealing place for businesses to invest. Over time, a lower level of investment – in machinery, equipment, advanced process technologies, intellectual property products, and physical infrastructure – means less productive workers, which in turn tends to weigh on real wages.
A second consideration is the cumulative impact of – and the interactions among – the full suite of taxes that businesses must deal with. In the BC context, companies also pay sales tax on many of their “inputs,” carbon and other fuel taxes, and property taxes. Companies involved in natural resource industries pay royalties and other levies linked to their operations on Crown land. There are also payroll taxes – CPP and EI premiums at the national level, plus WorkSafeBC premiums here at home.
One measure of the tax burden on new business investment is the “marginal effective tax rate” (METR). It captures the combined effect of the corporate income tax, capital taxes, sales taxes on business inputs, investment incentives, and the tax rules governing depreciation, inventory etc. It turns out that British Columbia has a relatively steep average METR (the specific rate varies by sector), as shown in the table below. (It will rise further once the new, higher BC corporate tax rate is in place.]
The factors behind BC’s high METR are the impact of the province’s antiquated retail sales tax on the cost of investment, as well as on general business operating costs; a heavy property tax burden on certain industries and companies in some communities; and a paucity of investment-related incentives and financial inducements in the province, particularly compared to many American states.
Add it all up, and the reality is that the overall tax regime for business and industry in British Columbia is less attractive than some politicians and commentators seem to believe. This suggests the new BC government should be cautious about raising taxes on firms that are seeking to grow their footprint and create/sustain jobs in the province.