B.C. election set to push the tax-hike envelope

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British Columbia is bracing for an election campaign rare in Canadian politics: It pits two parties wooing voters not with tax cuts, but with tax hikes.

A few weeks ago, the B.C. Liberal budget announced tax changes to take effect later in 2013 and 2014. Similar tax increases had already been discussed by the B.C. NDP, so with their budget, the Liberals took the tax-increase platform plank away from the NDP. Last Thursday, the NDP responded as they announced their tax platform – in effect, "doubling down" on tax increases by matching the Liberals and then going still higher. What do the NDP's proposed tax increases mean for B.C.?

The NDP plan raises taxes in four ways.

First, the top provincial income tax rate would increase by 2.2 percentage points. Added to the 2.1 percentage points proposed by the Liberals, this would take the top personal tax rate to 19 per cent from 14.7 per cent for B.C. This would place the top rate as the fourth-highest in Canada, behind only Nova Scotia, Quebec and Ontario.

Second, the NDP would move the corporate income tax rate up by one percentage point. On top of the one-percentage-point increase proposed by the Liberals, this would move the B.C. corporate tax rate up to 12 per cent. B.C. did have the country's lowest corporate rate; under this proposal, B.C. would be in the middle of the pack.

Third, there is a broadening of the carbon tax base to cover "venting emissions." Finally, the corporate capital tax on banks would be reinstated at rate of 3 per cent – although financial institutions headquartered in B.C. would be taxed only at 1 per cent.

A quick analysis of these tax proposals yields insights from three angles: revenue, fairness and efficiency.

I am skeptical about the revenue estimates because they seem to expect taxpayers to avoid responding to the higher tax rates by shifting their activities. Alexandre Laurin of the C.D. Howe Institute has recently shown how this works for personal taxes in B.C., but for corporate income and capital taxes the possibility of tax shifting is still more acute. My view is that the revenue haul from these proposed taxes will not take us very far down the laundry list of spending plans that the B.C. NDP will be announcing during the campaign.

Tax systems rely on perceptions of fairness. The rise in income inequality among the highest earners has led many Canadians to demand a shift in the distribution of tax obligations – some people reasonably wonder whether those among us who have done best over the past decades can shoulder more of the burden. The personal income tax hikes in the NDP plan accord with these desires. However, taxing corporations and banks more heavily is less well-motivated. Big pension funds such as the Canada Pension Plan Investment Board are heavy investors in banks, for example. These taxes on banks and other corporations will catch some well-off people, but they will also catch many Canadians who are not well off. We should always be on guard against the faulty thinking that corporations are people. In my view, the personal income tax is the right tool to address equity concerns, not corporate taxes.

The efficiency of our economy is the underpinning of future prosperity. A sound environment for investment provides the growth we need for the economy of tomorrow. On this front, the focus on corporate income taxes might be questioned – and the capital tax is even worse. The research of economist Bev Dahlby suggests that the loss in economic efficiency from poorly designed corporate taxes is very high. Taxing the sources of economic growth is unlikely to generate more economic growth.

The campaign in B.C. is just beginning. We will hear more from the B.C. NDP on its spending plans in the weeks that come, and it is likely the B.C. Liberals will respond with further economic proposals. The voters of B.C. should pay attention to gather information for their upcoming ballot.

For all Canadians, this B.C. election presents something of a novelty: An election campaign fought not on tax cuts, but on big versus bigger tax increases. The outcome of a campaign fought on this basis might carry lessons for other provinces as well.

Kevin Milligan is an associate professor of economics at the University of British Columbia's Vancouver School of Economics.