If You are Given Lemons, Make Lemonade

By: Nick Pantaleo

The Expert Panel on BC’s Business Tax Competitiveness issued its report to the Minister of Finance in late August (see http://www.fin.gov.bc.ca/experts_panel_tax.htm).  Relative to the circumstances that resulted in the creation of the Panel, the report’s release did not seem to generate a lot of fanfare.

The Panel was established by the BC government in early 2012 after the referendum decision last year to abandon the Harmonized Sales Tax (HST) and bring back the Provincial Sales Tax (PST).

You remember that fiasco, don’t you?

The BC government, following the lead of Ontario and almost every country in the world (except the US), introduced the HST in 2010. A huge protest ensued within BC, lead by former premier Bill Vander Zalm. The protesters successfully petitioned that a referendum be held. Notwithstanding that under the relevant legislation a referendum decision needed 50% plus 1 of registered voters in order to pass, then BC Premier Gordon Campbell announced, perhaps to placate opponents or perhaps because he thought it would be easier to win, that the BC government would respect the decision of the majority of actual voters.

The result? With only about 52% of registered voters voting, 55% (or a little more than a quarter of all registered voters) decided to kill the HST. True to the promise to respect the outcome of the referendum, the province plans to reintroduce the PST effective April 1^st, 2013.

In the wake of the referendum loss, the Panel was established to “generate ideas and provide recommendations for a business taxation system for British Columbia that balances the principles of competitiveness, fairness and simplicity.” However, under the guidelines given by the government, the Panel had to respect the referendum result and its recommendations had to be revenue neutral. The BC government in effect said, “Hey, we couldn’t make Plan A work, so give us Plan B to mitigate the damage to our competitiveness.” A pretty tall order, to say the least.

Bravely, the Panel did not hold back in its assessment of the effect of abandoning the HST, saying at the outset of its report that “[t]he return to the PST will significantly increase the cost of businesses making the capital investments needed to remain competitive. Unless addressed, BC’s businesses will face the highest effective tax rate on new investments among the provinces in 2013.” These comments are repeated throughout the report, along with a somewhat gloomy assessment of BC’s recent economic and productivity performance.

The Panel came up with an impressive list of 38 recommendations, most of which are directed at reducing “the PST burden on investments BC businesses must make to remain competitive” (ed. note: this is what the HST was intended to help do) and making “the PST fairer in its distribution, more neutral in its application across industries, simpler to administer and easier to comply with.”

Its key recommendation is to introduce a refundable investment tax credit equal to the PST paid on machinery and equipment, claimable over two years. This sounds like something similar to an input tax credit under a HST system, but it would not be nearly as efficient.  Still, the Panel believes that a refundable investment credit would substantially reverse the increase in the marginal effective tax rate on new investment resulting from the return to the PST.

The Panel’s second main recommendation is a bit of an eyebrow raiser: it recommends a task force be appointed to explore and fully develop the design of a Business Transfer Tax (BTT), something that, conceptually, is similar to a value-added tax, like the HST and GST. Many might say that a BTT is inferior to a GST from an operational perspective. In fact, the grey haired practitioners will remember that a BTT was one of the alternatives discussed in the 1980’s before the federal government settled on the GST.

It is not clear why a BTT would be more acceptable to BC voters than a HST or why businesses would welcome a “made in BC” VAT system that is different from that of most of the rest of the country. Perhaps the Panel hopes for a similar outcome to that of the 1994 Peterson Committee, which was struck to “fulfill” the federal Liberal’s 1993 election promise to scrap the GST. That committee’s primary recommendation was harmonization. In other words, keep the GST.

To offset the reduction in revenue from the recommendation to refund the PST on machinery and equipment, the Panel proposes that the exemptions for school supplies, certain foods, and telephone and cable services be eliminated (partially offset by increases in the sales tax credit for lower income individuals and families). As well, the Panel recommends an increase in the tobacco tax, a surcharge on provincial mining, oil and gas revenues sufficient to offset the investment tax credit these industries would receive, and an increase in the corporate income tax rate to 11.5%.

All in all, the Panel performed admirably under difficult circumstances in a very short time frame.

Time will tell how and when the BC government will react. This much is certain – Canada needs a thriving BC economy, for which the HST was intended to be a powerful boost.  As long as uncertainty surrounds such fundamental things such as taxation, in particular, taxation of business investment, that goal will be more difficult to achieve.

BC to extinguish HST

The results of the referendum in British Columbia regarding whether to extinguish the HST (Harmonized Sales Tax) and reinstate the PST (Provincial Sales Tax) in conjunction with the GST (Goods and Services Tax) have been announced. British Columbians have voted to return to a GST and PST sales tax system.

It is expected that the change back to PST will be March 31, 2013. Additional information will be provided as it becomes available.