Finlayson & Peacock Op-Ed: Budget’s higher business costs dim B.C. investment prospects

The first full budget unveiled by the BC NDP government offers a mix of higher spending, tax hikes on business and significant commitments to expand child care and address concerns over housing affordability and real estate speculation.

Finance Minister Carole James was determined to deliver on some of her party’s key election platform promises. But she also wanted to keep the operating budget balanced and limit increases in taxpayer-supported debt to safeguard the province’s triple-A credit rating.

The good news is that the budget is expected to stay (slightly) in surplus in 2018-19 and the following year, while taxpayer-supported debt, measured as a share of GDP, will remain below 16%.

Provincial government revenue is projected to climb by 8% over the next two years. Part of this reflects new and higher taxes (discussed below). But an economy that continues to put up decent growth numbers is also helping the government’s bottom line.

The new employer health tax (EHT) comes as an unwelcome surprise to the business community. Set at 1.95% of payroll for all but the very smallest firms, the tax will generate almost $2 billion a year by 2019-20. Described as a replacement for Medical Services Plan (MSP) premiums – which are being eliminated – the EHT spells higher labour costs for B.C. employers, even those who currently pay MSP premiums on behalf of their workers. Moreover, in 2019 many employers will find themselves paying both the new payroll tax and MSP premiums as the government effectively “double-dips” for almost a year.

The budget contained important announcements affecting the housing sector. We recognize the pressure on government due to widespread public anxiety over housing affordability and the role of non-residents in driving housing markets. In response, the minister is taking a series of steps to curb housing demand, including foreign demand, but also to extract more revenue from some property owners. Taken together, the housing-related measures in Budget 2018 are unprecedented in scope and will produce upwards of $500 million in extra revenue.

• The foreign buyer’s property purchase tax introduced by the former Liberal government is increased to 20% from 15%, and its geographic reach is extended to the Fraser Valley, Greater Victoria and the central Okanagan. There is no grandfathering for foreign buyers who entered into valid contracts prior to the budget – a flaw in the policy, in our view.
• A higher property transfer tax rate (5%) will now apply on homes valued at more than $3 million.
• The provincial school tax rate is increased on homes assessed at $3 million and up.
• A “speculation” tax is introduced on residential property, at a rate of 2% of assessed value by 2019. It is targeted at both foreign and Canadian non-residents who own property in urban areas but don’t pay B.C. income tax. Principal residences are exempt. This amounts to a new, annual property tax levy that hits homeowners who pay little or no B.C. income tax. We are troubled that the rule is structured to exempt property owners who pay B.C. rather than federal income tax. As such, it will impose a sizable added tax burden on Canadians who have second or vacation homes in urban communities across B.C. We are not aware of any other province that has adopted such a measure.

It remains to be seen how all of these initiatives will affect housing demand. B.C.’s busy housing sector, along with associated construction activity and retail spending, has been a major factor powering economic growth in recent years. A material slowdown in residential investment spending and sales activity, should one occur, could weigh noticeably on future GDP and job growth.

The most glaring missing piece in Budget 2018 is the failure to acknowledge or tackle B.C.’s lagging investment performance.

We have long been worried about the long-term consequences of weak capital formation in the province. B.C. businesses aren’t investing enough in machinery, equipment, advanced process technologies, intellectual property products, and other assets that make our firms and workers more productive.

On a per employee basis, our businesses invest less than 60% as much as their American counterparts, on average. And like Canada, British Columbia is losing ground to the United States on competitiveness, capital formation and business attraction, owing in part to higher taxes, increased regulation and rising carbon and energy prices on our side of the border, at a time when the U.S. is moving in the opposite direction. Nothing in Budget 2018 suggests the government is keen to confront that problem.

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.