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