Corporate income tax rates are rising and there’s a tax break for small business in B.C.’s budget update, but overshadowing the new government’s balanced books is the spectre of global uncertainty, particularly with our southern neighbour.
No major surprises were revealed in Monday’s budget update, “which is good,” said Jock Finlayson, executive vice-president of the Business Council of B.C. “The overall fiscal framework — total spending, total revenue, budget surpluses, management of the debt-to-GDP ratio — I would say is reasonable overall.”
Val Litwin, president of the B.C. Chamber of Commerce, agreed. “We always applaud government when they deliver a balanced budget, so that’s important … There is a little bit in this budget for everyone.”
Finance Minister Carole James painted an optimistic picture of the economy, saying employment, retail sales, housing starts and exports have all exceeded expectations. This year’s GDP growth is predicted at 2.9 per cent.
“We’re competitive as a province, a destination for investors, and we’re commited to seeing that continue,” she said.
B.C.’s corporate income tax rate is being increased to 12 per cent from 11 per cent, putting it on par with Alberta, Saskatchewan, and Manitoba.
The small-business income tax rate is being shaved to two per cent from 2.5 per cent, something that was welcomed by Litwin.
The Business Council does not favour that decrease, saying B.C. already has some of the lower rates in the country.
If a business’s profit is below $500,000, it pays two per cent. One dollar more and it pays 12 per cent, Finlayson said. “At the margin, it is actually a disincentive to growth, which is an odd thing for the tax system to do.”
Litwin and Finlayson both support the government’s two-year phase-out of provincial sales tax on electricity for business.
Budget documents show that the first part of the phase-out will mean $21 million less to the province in 2017-2018, and $82 million in subsequent year.
This move will help industries that are intensive users of electricity, such as pulp and paper, manufacturing, metal fabrication, and food processing, Finlayson said.
The province acknowledged global risks that could affect the economy — such as the softwood lumber dispute, the future of NAFTA, economic uncertainties in Europe and Asia, and at home the possibility of rising interest rates.
Finlayson cautioned that the North American economy is at the tail end of a long expansion cycle.
“In Canada’s case it was kind of interrupted by the oil price collapse of the 2015 and 2016. But for the U.S. they are moving into almost a full decade of sequential year-over-year economic growth,” he said. “There is a growing sense that the U.S. economy is sort of overdue for a recession or a downturn. If and when it happens and I think it is a question of when, not if, that will obviously change the macro-environment for Canada and for B.C.”
The U.S. takes 54 per cent of goods exported by B.C.
An economic slide could see the province facing a “sizable budget deficit” if it hard-wires new spending commitments, such as renters’ or daycare subsidies, into future budgets, Finlayson said.
“There’s a bit of a risk on that going forward and it is going to be a challenge I think for the minister and her colleagues, especially if the global economy cools off, to manage the expectations around government spending.”
The Business Council is concerned about business costs, such as the cumulative impact of a higher corporate income tax rate, increases in the carbon tax, the costs of government regulation, and rising electricity prices.
“It does weigh on the investment sentiment on manufacturing and mining and other industries in B.C.,” Finlayson said.
