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Finlayson & Peacock Op-Ed: B.C. tax regime hurts new investment in equipment, technology (Business in Vancouver)

While B.C. has recently posted some impressive economic numbers compared with the rest of the country, in a few areas we continue to underperform. The most glaring example is non-residential business investment.

Investment in “tangible” capital, such as machinery, equipment, structures, advanced technology products and engineering infrastructure, is essential to a thriving business sector. Increasingly, investment in “intangible” forms of capital, such as research and development, patents, trademarks, business processes and employee training, is also becoming a key ingredient in business success. Both kinds of capital contribute directly to economic growth and job creation in the short term. And with time, the benefits of such investments are magnified. Expanding and improving the stock of capital means that employees have up-to-date machinery and equipment, modern facilities, more efficient infrastructure and better intellectual property products to work with, allowing them to become more productive (and, hopefully, to earn more). 

Non-residential investment in B.C. has been lagging over the past decade or so. Moreover, the province has comparatively low levels of capital spending on a per-employee basis. A glance at total business capital expenditures on structures, machinery and equipment reveals a sizable gap with Canada. Investment as a percentage of gross domestic product (GDP) is a full percentage point and a half less in B.C. than in Canada, and the country as a whole has a mediocre record when judged against many other advanced economies.

 

Investment in new machinery, equipment and advanced process technologies is where B.C. really falls short. Again measured in relation to the size of the economy, machinery and equipment capital spending amounted to 3.7% of GDP in 2014, well below the 4.5% ratio at the national level. Of greater concern, such investment has generally trended lower since 2000.

The C.D. Howe Institute regularly tracks capital spending in Canada, the provinces and other developed-economy jurisdictions, focusing specifically on investment in tangible capital. In B.C., average tangible investment per employee stood at $12,000 in 2014, well below the Canada-wide figure of $14,300. Using the same measure, the typical worker in B.C. benefited from capital spending equivalent to just 60% of the amount available to his or her counterpart in the United States.

What can the government do to stimulate more investment in productive assets? Tax policy is the most powerful lever available to policy-makers. Unfortunately, the province is handicapped by having relatively high effective marginal tax rates on new business investment across most industry sectors. The effective marginal tax rate is an all-in measure of the tax bite on each dollar of incremental capital spending. With the restoration of the provincial sales tax (PST) in 2013, the average effective marginal tax rate jumped by more than 40%, making B.C. one of the least competitive jurisdictions in North America for new capital spending.

To make the province a more attractive location for firms looking to deploy capital, policy-makers should be looking at the following options.

First, modify the provincial sales tax to exempt investments in machinery, equipment, other advanced technology products and software. The exemption should apply to all industries. It is punitive to levy a consumption tax like the PST on investments that companies undertake to upgrade and expand their capital stock.

Second, remove the PST from business purchases of electricity. The extra cost associated with the PST on electricity is one of the factors hindering new investment in export-oriented B.C. industries such as manufacturing, pulp and paper and mining.

Finally, to spur capital spending that is aligned with the emerging digital economy, B.C. could introduce investment tax credits or “bonus depreciation” schemes that encourage new investment in equipment, software and other assets that support the shift to digital platforms and services. Taking this step would give businesses in B.C. a competitive edge at a time of accelerating worldwide technological change. 

Jock Finlayson is the Business Council of British Columbia’s executive vice-president and chief policy officer; Ken Peacock is the council’s chief economist.

As published in Business in Vancouver.