Economic News/Trends and Analysis — August 13, 2009

BC Progress Board Supports the Harmonized Sales Tax

    VANCOUVER, Aug. 13 /CNW/ - As with any significant tax change, some will
prefer the new system and some the old. As you make up your mind about the
relative costs and benefits of harmonization try to keep a few things in mind.
    BC's average productivity growth since 1981 was one-third of Canada's and
below every other province's. Investment intensity, a measure used to separate
investment growth due to favourable economic conditions from that due to the
incentive for businesses to invest, shows that BC has a long-standing problem
due to the province's investment structure.
    Our recent report "Investment in British Columbia: Current Realities and
the Way Forward" describes BC's below average productivity performance as well
as underlying causes and possible solutions. The most important recommendation
is to replace PST with a value-added tax, preferably harmonized with the
federal Goods and Services Tax.
    Services and some goods will be subject to more tax and relative consumer
prices will change although they may not increase significantly on the whole.
There are several tools available to offset the impact on consumers. All of
those identified by the BC Progress Board are incorporated in the proposed
HST: less than full input tax credits; special treatment for new housing; some
items excluded from the provincial portion of the tax; an enhanced tax credit;
and, federal transition funding.
    Although the HST has critics, no one is claiming that harmonization is
bad for the province as a whole. The diffuse benefits from increased
investment, productivity and increased living standards will benefit us all -
even those who currently prefer the PST.
    The current PST stands out as a particular disincentive to invest in BC.
In 2008, the PST accounted for more than one-third of BC's Marginal Effective
Tax Rate (METR), a broad measure of the tax burden a business faces on new
investment. The proposed HST will decrease BC's METR by 40 percent and will do
more to stimulate investment than complete abolition of the province's general
corporate income tax would. Evidence from the Atlantic provinces suggests that
the HST could close 70 percent of the investment intensity gap between BC and
the national average.
    In its simplest terms, productivity and productivity growth determine how
much a jurisdiction can produce and consume given finite resources. For a
business, surviving in competitive markets means being as productive as
possible; that is, producing as much output per unit of capital and labour as
possible. For an individual worker, productivity levels ultimately determine
the wage they can demand in a market. And at a broad societal level,
productivity growth holds the key to funding critical public services such as
infrastructure, health care, education and other social services that are
fundamental to a high quality of life.
    Productivity growth is held up as the single most important determinant
of a jurisdiction's standard of living because it is the only GDP driver with
no upper limit. Others, like employment, have natural boundaries which limit
their contribution. For example, last year 74 percent of BC's working age
population was employed. If BC's employment rate were to grow as it did
between 2001 and 2007, we would see an increase in real GDP per capita.
However, employment as a GDP growth driver is limited because the rate cannot
exceed 100 percent.
    Replacing the Provincial Sales Tax (PST) with the Harmonized Sales Tax
(HST) removes a large impediment to investment. More investment brings in new
technology and fuels the innovation which sustains ongoing productivity
improvements. As long as BC continues to innovate and improve productivity, we
will reap improvements in our standard of living.
    It is not obvious that our province is gradually slipping in measures of
productivity because BC has many advantages that have allowed it to prosper in
spite of the disincentive of a high effective tax rate on investment. By
moving to a Harmonized Sales Tax and removing a large impediment to investment
and productivity growth we are more likely to see better productivity
performance and the eventual result of increased living standards.

For further information: Gerry Martin, Chair, BC Progress Board, (604)
775-2116

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