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Peacock Op-Ed: Looking to B.C. Budget 2017 — Strengthening B.C.’s Competitive Position (Surrey Business News)

B.C.’s economy is in reasonably good shape and the province looks to be on track to lead the country in economic and job growth this year and likely next year as well. This relatively buoyant economic backdrop is boosting B.C. government revenues and providing the province with some fiscal room. The recently released First Quarterly Report shows the B.C .government with a $2 billion surplus in 2016-17, thanks mostly to upside revenue surprises from personal income taxes and the property transfer tax.

While all this is good news, the fact is that British Columbia’s competitiveness within North America has eroded over the past several years. The extent of the problem varies across sectors and industries. But companies operating on the land base, manufacturers, and industries that rely significantly on energy to run their operations face mounting difficulties stemming from complex First Nations claims, onerous permitting and environmental rules, and high and still rising tax-inclusive energy costs. Across the province, the forestry, mining, and oil and gas industries are at the forefront of these challenges. Closer to home, in Surrey the agriculture industry and local manufacturers (lumber mills, parts of food processing, industrial equipment, high-tech) are all also challenged by B.C.’s deteriorating competitive position.

For firms not engaged in manufacturing or natural resource-related businesses, the province arguably provides a more attractive competitive environment, but even sectors such as film and television production, advanced technology, the Gateway and related transportation sector, finance, tourism, and scientific and technical services are sensitive to developments in government policy which can affect the cost of doing business in B.C.

With the province’s finances fairly healthy, the government is well positioned to implement some measures to generally improve BC’s competitive position.

The province’s antiquated PST system is one area where significant headway can be made. Here there is a wide range of options to make the less PST less damaging to investment and business growth. The most realistic approach is to introduce changes to the existing PST system. For example, the government should remove PST from electricity purchased by industrial and commercial firms. B.C. is one of the few jurisdictions that levies a retail-type sales tax on business purchases of electricity. Electricity is an input into the production process for all businesses, but for some of B.C.’s export-oriented operators in the resource and manufacturing space it is one of the largest cost items. Removing the PST from electricity would help offset some of the higher costs that natural resource companies and manufacturers absorbed when the HST was eliminated and the province reverted to the PST, and from rising electricity rates and B.C’.s carbon tax. From both an environmental and a tax policy standpoint, it makes little sense to apply a retail consumption tax like the PST to business purchases of electric energy that is generated from carbon-free sources (almost all electricity in B.C. comes from non-thermal generation).

Another measure to improve the PST would be to broaden the existing suite of PST exemptions to stimulate investment in new machinery, software, advanced process technologies, and other capital equipment. As it currently stands, the PST is applied to business inputs with only a moderate number of exceptions. Recognizing that taxing machinery and equipment discourages companies from investing and upgrading in new tools and productivity-enhancing technologies the government long-ago exempted some types of machinery and equipment used in the resource and manufacturing industries from the PST. This reasoning should be extended to other industries and some other business inputs. Specifically, the government should reduce, and over time eliminate, PST on business purchases of all kinds of machinery and equipment, software, vehicles, and telecommunications and data services. And as financial resources permit these exemptions should be expended to all industry sectors.

Removing sales tax from these inputs would stimulate investment in capital equipment and digital and other communications-related technologies that are central to realizing productivity gains and improving operational performance for enterprises in B.C.

There is also a need to increase the number of high-skilled individuals, which is another fundamental building block in building a more productive and competitive B.C. economy. To this end, the provincial government should expand engineering education capacity in the post-secondary system. Providing funding for scholarships at the graduate level would allow B.C. to be more successful in attracting top-flight graduate students. B.C. should also lobby Ottawa to expand the Provincial Nominee Program, which permits the province to fast track immigration applications from foreigners with in-demand technical, managerial, and professional skills.

While the above measures do come with a fiscal price tag, adopting them would significantly strengthen B.C.’s competitiveness and better position the province to grow a more productive business sector. And a compelling argument can be made that these kinds of steps should be undertaken while the province has the fiscal capacity to do so.

Ken Peacock is Chief Economist and Vice-President of Business Council of B.C.  

As published in Surrey Business News.