BC Provincial Tax Reform Could Boost Workers’ Annual Income by up to $1,700: Report

BC Provincial Tax Reform Could Boost Workers’ Annual Income by up to $1,700: Report
People carry shopping bags as they walk to vehicles in the parking lot at McArthur Glen Designer Outlet in Richmond, B.C., on Dec. 26, 2020. THE CANADIAN PRESS/Darryl Dyck
Carolina Avendano
Updated:

Reforms to British Columbia’s provincial sales tax could increase workers’ annual earnings by as much as $1,700, a newly released study says.

If B.C. replaced its provincial sales tax (PST) with a tax that combines both provincial and federal taxes into a  harmonized sales tax (HST), it would encourage investment in the province and increase workers’ average hourly earnings anywhere from $700 up to $1,700, says the Fraser Institute report.

“British Columbia’s Provincial Sales Tax harms business competitiveness and investment by taxing some businesses inputs, especially machinery and equipment, distorting consumer choices by taxing most goods but relatively few consumer services, and imposing high compliance burdens on firms because of its complexity,” wrote the report’s author and Fraser Institute senior fellow Bev Dahlby.

The province’s PST currently sits at 7 percent. According to the 2024 provincial budget, sales taxes are the B.C.’s government’s second-largest source of tax revenue after personal income tax.

As a result of the PST, British Columbia has the highest marginal effective tax rate on all forms of investment in Canada. The study suggests that eliminating B.C.’s sales tax would lower the aggregate marginal effective tax rate (METR) from 25.6 to 16.2 percent.

This would encourage investment in the province—especially on machinery and equipment—resulting in increased labour productivity, economic growth and, ultimately, more earnings for workers, Mr. Dahlby said.

British Columbia is among the provinces that have implemented PST along with jurisdictions like Saskatchewan (6 percent), Manitoba (7 percent), and Quebec (9.975 percent).

Other provinces like Ontario, New Brunswick, and Nova Scotia, have adopted the Harmonized Sales Tax, by integrating federal and provincial sales taxes into a single, unified tax–a form of value-added taxation (VAT).

Mr. Dahlby pointed to evidence from a model proposed in a 2017 paper by the University of Calgary’s School of Public Policy, in which a 10 percent reduction in METR was shown to increase the capital-labour ratio by 1.16 percent. The capital-labour ratio is an estimate of the amount of equipment and infrastructure available per worker and an indicator of higher productivity.

The model also showed that a 10 percent growth in a provincial economy’s capital-labour ratio increased the average real wage rate in the province by between 2.45 and 6.45 percent. The real wage rate estimates how much goods and services workers can actually buy with their earnings after inflation adjustments.

The study further proposes adopting an HST or a value-added tax tailored to B.C. It does so based on a study of the economic landscape in 1997, when the Atlantic provinces adopted the HST, while other provinces, except Quebec, retained their retail sales taxes.

In the years following the adoption of the HST, the Atlantic provinces saw their per capita investment rise by 11.1 percent above its trend, as well as an increase in investment in machinery and equipment from 12.1 to 16.7 percent. This, the author wrote, indicates that replacing retail sales taxes with HST favours investment in machinery and equipment.

“The current PST is the tax producing the greatest disincentive for investment in British Columbia,” Mr. Dahlby said. “Replacing the provincial sales tax with a harmonized sales tax, or made-in-BC value added tax, would reduce the taxation of business inputs, especially taxes on machinery and equipment.”