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Finlayson: Return to PST has hurt BC's competitiveness (Vancouver Sun)

April 1 marks the one-year anniversary of the return of the Provincial Sales Tax following B.C. voters’ decision in 2012 to scrap the Harmonized Sales Tax. It is a good time to reflect on the province’s competitive position in a world where many jurisdictions are aggressively seeking to attract private sector investment and the jobs and economic activity that come with it.

There can be no doubt switching back to the PST altered the business landscape in a way that left the province at a competitive disadvantage. That’s why virtually all economists supported the HST. The situation varies by sector, and not all industries have been hurt by restoring the PST. But most have been.

Reinstituting the PST has increased what economists refer to as the “marginal effective tax rate” on new investment in the natural resource extraction and processing sectors as well as in all parts of secondary manufacturing, film production, construction, telecommunications, and transportation, among other industries.

The PST pushes up costs for a wide range of items that companies typically must purchase to run their businesses: for exmaple, machinery and equipment, computers and other IT products, vehicles, furniture and fixtures, construction materials, transportation services, office supplies, energy, telecommunications, and legal services.

With the HST, companies received rebates for the sales taxes paid on these types of business inputs.

That’s no longer true under the PST (except for a small number of input categories). The net result: The cost of producing goods and services in B.C. has jumped, significantly in the case of some industries. Businesses also face an extra $150 million to $200 million in annual accounting and tax compliance costs now that the province has reverted to a sales tax system that’s no longer integrated with the federal GST.

My discussions with business executives confirm that re-establishing the PST has made it harder for many industries to justify deploying additional capital here.

But how does the province compare in other areas that also influence competitiveness? The picture is mixed, as documented in the final report of the B.C. government’s Jobs and Investment Board, which was quietly released this year.

The generally high quality of the workforce is an economic plus for B.C.

Some of our industries benefit from proximity to Asian markets and to the dynamic U.S. west coast.

The statutory business income tax rate is attractive compared with many other provinces and American states. But this advantage is diminished because of more extensive and generous tax and investment incentive programs in other jurisdictions.

B.C. has historically enjoyed low-priced electricity. However, this is changing due to strong upward pressure on domestic power costs coupled with flat or declining costs in U.S. states that are turning to gas-fired electricity to meet a larger share of their energy needs. At the same time, B.C.’s carbon tax — unique in North America — has boosted fossil fuel energy prices relative to other North American jurisdictions, thereby reducing profit margins for energy-intensive industries operating here.

For some resource-based industries, manufacturers, infrastructure providers, and tourism operators, the regulatory environment in B.C. detracts from competitiveness and complicates efforts to pursue new projects. Industry leaders point to lengthy decision-making processes, a lack of clarity around approvals and permitting, rising government-imposed fees as among the problem areas.

B.C.’s tourism industry continues to suffer from inadequate and sometimes inconvenient air access for international visitors, coupled with excessive taxes and fees imposed on travellers using Canadian airports.

In a recent survey of Business Council members, high land and housing costs in Metro Vancouver emerged as a factor discouraging business growth and investment in several industry sectors.

Finally, the province’s infrastructure is under stress due to aging physical assets, a growing urban population, expanding trade flows, and environmental pressures. While improvements have been made thanks to significant investments by governments and the private sector, resource industries lack sufficient road, rail and pipeline access to meet rising foreign demand and parts of our urban infrastructure require modernization and repair.

The provincial government is focused on keeping the budget balanced and pursuing the development of a liquefied natural gas industry in B.C. Both are worthwhile objectives.

But policy-makers need to pay closer attention to the broad competitive landscape and monitor how the province is faring in attracting capital and high-value business activity.

The results of Statistics Canada’s 2014 investment intentions survey provide no grounds for complacency on this score, signalling a very subdued near-term outlook for capital spending and persistent weakness in machinery and equipment investment.

As the Jobs and Investment Board observed in its report, there is much more work to be done if B.C. wants to raise its economic game.

As posted online at VancouverSun.com