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February 6, 2011

Tax Fairness

NDP leadership candidates will have a difficult time catching attention until nearer their April vote, two and a half months from now. The BC Liberals will elect not only a new leader but also a new premier on February 26. We'll see a budget introduced to the legislature on February 15, a placeholder until a premier is chosen, and a new cabinet sworn in sometime in early March. It is no wonder that NDP leadership hopefuls have difficulty getting much attention against that background.

If the calendar of events weren't enough, the Liberal infighting is taking space in the media. Kevin Falcon called Christy Clark "glib: but that is nothing compared to the harsh words between Clark and George Abbott over alleged irregularities with membership sign-ups. Abbott's campaign was dealt a serious blow when it was revealed that one of his campaigners was behind a website attacking Clark over the sign-up of Olympia the cat. With the stakes being who becomes premier, it is not likely that controversies will simmer down anytime soon for the Liberals.

Against that noisy background, the NDP's Adrian Dix got some attention with his comments on rolling back tax cuts for corporations. After his announcement, he faced a tough interview on CKNW's Bill Good show where he demonstrated an impressive command of the facts. Paul Willcocks followed-up with an interesting article on his blog writing: "Dix has, at least, started a needed debate on tax policy and who should pay for the services government provides." However there is usually a "but" when a politician receives even faint praise; in this case Willcocks preceded his comment with the observation that both Kevin Falcon and Dix appeal to their party's core supporters but: "That success might not translate as well into an actual election campaign, where the emphasis is on winning over moderate or uncommitted voters."

Willcocks acknowledged that the shift in who pays for government services is "undeniable and large". It is worthwhile to review the Liberal tax shift so as to separate the rhetoric from the quantifiable reality as documented by the Ministry of Finance.

Budget documents helpfully include a table, "Summary of Tax Measures", which shows the fiscal impact of tax changes. The 2010 budget noted that increasing MSP premiums by 6% effective January 1, 2011 raises $108 million for the government in fiscal year 2011-2012. That's the premium hike that sees you paying $84 a year more with new rates of $115 per month for couples and $121 for families of three or more. BC is the only province that continues to use what amounts to a flat regressive tax to finance health care. Relief is available to those with incomes under $30,000 but someone with $30,000 income pays the same premium tax as someone with a $3 million income. Ontario has something it calls a health premium but it is really an income tax surcharge; it increases until it reaches a maximum of $900 per year for those with incomes of $200,600 and above. Do the math; someone in Ontario with a $200,600 income pays $552 a year less than a family of three in BC with a $30,000 income! Of course, BC needed to grab an additional $108 million a year from MSP premiums because it was cutting corporate taxes. To his credit, Dix put those facts together. You won't see it in the budget that announced the MSP premium increase but if you go back to the 2008 budget you'll find the announcement that: "Effective July 1, 2008, the general corporate income tax rate will be reduced to 11 per cent from 12 per cent - with further reductions planned to 10 per cent by 2011 ($415 million over three years)."

It is hard to deny that increasing MSP premiums at the same time that corporate taxes are being cut amounts to a tax shift. That is a smaller version of the $1.9 billion per year tax shift from corporations to families behind the HST.

The BC Liberals have a record of making major corporate tax cuts shortly after elections without saying a word about them during the election campaign. Shortly after taking power, the BC Liberals introduced corporate tax cuts effective July 30, 2001 that cost $248 million just for the 8 months that remained in that fiscal year. Those cuts included exemption from the provincial sales tax on production machinery and equipment purchased by eligible manufacturers and by businesses in the logging, mining, and energy sectors, yet 9 years later when they announced the HST they couldn't point to any studies showing benefits from that PST exemption and they claimed that the HST would stimulate investment even though machinery and equipment was already tax exempt.

In September 2005, after their re-election, they brought in a revised budget which reduced the general corporate income tax rate from 13.5 per cent to 12 per cent retroactive to July 1, 2005. Not a word was said during the 2005 election campaign about that planned cut which budget documents showed at an estimated cost of $143 million for the following full fiscal year.

Everyone knows about the massive corporate tax shift introduced by surprise after the 2009 election; the HST shifted $1.9 billion from corporations to BC families. As if that weren't enough, the post-election September budget update announced that as part of the carbon tax plan the general corporate income tax rate was reduced from 11 per cent to 10.5 per cent effective January 1, 2010 and to 10 per cent effective January 1, 2011.

The cumulative effect of 10 years of corporate tax cuts has been a shift in who pays for government services. Willcocks wrote:

"Despite inflation and economic growth, corporations are paying about $1 billion less in readily attributable taxes than they were in 2001, a drop of about 20 per cent. Individuals and families are paying about $8 billion more, an increase of about 60 per cent. (The change isn't just in income taxes. MSP premiums, for example have increased more than 80 per cent; the government is also taking in more indirectly, through B.C. Lotteries, for example.) You can argue the details. But the shift is undeniable and large."

Keep in mind that Willcocks' figures do not include the $1.9 billion tax shift brought about through the HST.

Has BC benefited from 10 years of BC Liberal tax shifting from corporations to BC families? The logical place to look is at business gross fixed capital formation in machinery and equipment for BC compared to Canada. Since 2001 BC has represented less than 11% of the Canadian total business investment in machinery and equipment. In the early 80s and early 90s, it was 12%. BC's population is 13.3% of Canada's so it appears that despite corporate tax shifts, BC isn't attracting its share of investment. Perhaps the newly appointed "independent" HST panel will produce some credible evidence to support the claim that corporate tax cuts stimulate investment. What the government has provided so far confuses offshore oil and gas development in the Maritimes with tax induced investment. That is not a convincing basis for increasing the MSP premium tax and residential care fees so as to compensation for cuts to the contribution to government revenues from corporations.

The BC Liberal party gets most of its funding from corporations. The evidence on the tax shift over the past 10 years suggests the corporations have gotten a very good return on their political investment.