OPINION: Tax regime undermining B.C.’s ability to compete for top tech talent

B.C.’s diverse advanced technology industry, and professional, scientific and technical services more broadly, have been expanding rapidly over the past decade. The pandemic accelerated many of the trends driving this growth.

As the John Horgan government turns to developing a post-COVID economic strategy, it should be looking at ways to support these dynamic industries.

The rise in employment in professional, scientific and technical services has been dramatic. Over the past decade, employment in this segment of the economy grew more than two times faster than the all-industry average. Since early 2020, these kinds of jobs have surged by a further 18%. Professional, scientific and technical services today account for one in 10 jobs in the province.

Within the sector, architectural and engineering services, legal services and accounting services have all grown at a well above average pace. But the strongest gains have been in technology related services, with employment in computer system design services more than doubling between 2010 and 2020.

There are reasons to be excited about B.C.’s advanced technology sector as well as the outlook for professional, scientific and technical services more generally. The province is home to Canada’s Digital Supercluster, which is working to build critical mass in the technology sector and to spur the take-up of digital tools, technologies and platforms across the economy. The province recently funded an innovation incubator intended to help scale up local technology companies. Several global technology giants, including Microsoft and Amazon, now have a significant presence in Metro Vancouver. And B.C. recently has seen the emergence of a half dozen “unicorn” technology companies valued at more than US$1 billion each.

The question is how to support and stimulate the further expansion of these industries. For all of them, the most important input is human capital. Human creativity, know-how, entrepreneurial skills and management expertise are vital to success in these sectors. Increasing the number of highly skilled, entrepreneurial, and creative people in the province will ultimately translate into more startups and stronger, better managed B.C. companies. For government, the key task is to establish an environment that attracts and keeps scarce talent.

Educated, highly skilled individuals are generally well-compensated and mobile, and for many of them tax rates matter. Here, B.C. has been moving in the wrong direction, going from a place with broadly competitive tax rates to one where talented people now shoulder among the heaviest income tax burdens in North America. On January 1, 2018, B.C.’s top marginal personal income tax rate was hiked to 16.8% from 14.7%. Then, Budget 2020 announced a further increase to 20.5%. Adding in federal income taxes, notably the 33% top federal tax bracket, highly skilled people working in B.C. now face a top marginal tax rate of almost 54%. Ontario’s highest provincial rate is 13.16% (versus 20.5% in B.C.) and Alberta’s is 15%. Moreover, in Alberta the top rate does not apply until income reaches $315,000, while B.C.’s highest rate kicks in at $220,000.

British Columbia’s personal income tax brackets and rates are structured such that tax on the first $200,000 of income is similar to Alberta’s and roughly $2,500 more than what the same taxpayer would owe in Ontario. But after that, B.C.’s escalating tax rates produce larger gaps. On $300,000 of income, the additional B.C. tax is $6,000 versus Alberta and $9,000 more compared with Ontario. At $400,000, a B.C. taxpayer could pay around $12,000 more than the same person in Alberta and roughly $16,000 more than in Ontario.

Factoring in the high cost of housing in Metro Vancouver and Victoria, B.C.’s personal income tax regime is now adding to the challenges of attracting and developing the talent needed to build an innovative, increasingly technology-driven economy.

Policy makers in Victoria should also recognize that Washington state – B.C.’s leading U.S. export market and our main partner in the emerging Cascadia Corridor – has no state-level personal income tax, meaning that Washington residents pay only the U.S. federal income tax. As a result, a highly skilled employee in Washington state, earning say U.S.$400,000 ($500,000), could pay US$50,000 less in personal tax than the same individual in B.C.

The pandemic has made it possible for many technology workers and other professional and technical employees to work “remotely.” In this world, sensitivity to marginal tax rates (and local housing costs) is likely to increase. If B.C. policy makers want to see more high paying jobs, more innovation and more corporate head offices in the province, they must step up efforts to develop, attract and keep talent. In our view, this requires rethinking some of the tax policy decisions made in the past few years.

Jock Finlayson is the Business Council of British Columbia’s Senior Policy Advisor; Ken Peacock is the Council’s Senior Vice President and Chief Economist.

As published in Business in Vancouver.