A Need for Focused Attention on Business Taxation (2007)
Any review of the competitiveness of the province’s taxation regime must address the fact that small- and medium-sized businesses (SME’s) play a pivotal role in the provincial economy. The Chamber has consistently been the leading voice calling for the recognition of the role played by SME’s in economic growth, job creation, regional and local development and social cohesion for communities across the province.
With this in mind, The Chamber believes that it is critical that the Provincial Government focus on SME’s as they develop their taxation plans.
The Importance of Small Business
BC has a strong reliance on small business with a full 98% of all businesses in BC being either self-employed or having 50 employees or less. While these businesses are active in all sectors and all regions of the province there is a concentration in business service sector with almost 22% of SME’S falling within this category (1).
The number of businesses does not tell us much about the true contribution and impact of the SME sector to the provincial economy, or to communities across the province. To understand this we need to look at the jobs these businesses bring to the economy.
In 2005 the level of job creation by SME’s in BC surpassed all other jurisdictions in Canada. SME’s in BC employed 1,012,100 people; this represents an impressive 57% of all private sector jobs in the province.
The critical role played by SME in the provincial economy necessitates the Provincial Government ensuring that their priorities address the very real and unique challenges facing these critical generators of economic activity and prosperity. These include, but are not limited to:
- A severe shortage of skilled workers;
- A transparent and non-discriminatory tax regime;
- Access to the education and an HR environment to ensure both understand and respect the demands of SME's;
- Access to finance, both start up and their ability to borrow; and
- The reduction of financial barriers to innovation.
BC’s Tax Competitiveness
The Government is to be commended for its track record in reducing the taxation burden on individuals and businesses across the province. The multiplicity of taxes and administration thereof which confront businesses add unnecessarily to the cost of doing business in a disproportionate ratio to some other jurisdictions. They do this in a number of ways. The first is through the direct costs of taxes, be they personal taxes meaning businesses in BC have to pay higher wages than their competitors to attract the talent, or business taxes that go straight to the bottomline or the proliferation of fees and licences that businesses face in BC today. This problem will be compounded because the downloading of expenses to municipalities could lead to new fees and taxes. A second is the indirect addition of administrative costs.
It must be noted that BC fares very well compared to other jurisdictions when it comes to taxation. At present BC’s corporate tax rates are 4.5% for small businesses and 12% for all other businesses.
In terms of personal taxation, BC is also not unreasonable compared to other jurisdictions. Indeed, BC has the second lowest top marginal tax rates in Canada and the lowest personal income tax rate in Canada for incomes lower than $100,000.
On this point we should be clear, The Chamber does not believe it is either appropriate or possible to believe that we can become the number one tax jurisdiction in Canada; indeed, the purpose of tax cuts must be to maintain a relative competitiveness against competing jurisdictions.
As we look to maintain our competitive tax position compared to our major competing jurisdictions, it is important to note that Alberta has publicly committed to reduce its corporate tax rate to 8% in the coming years. As BC looks to enhance its attractiveness as a jurisdiction for investment, it is critical that BC is positioned to respond to such aggressive tax cuts from our primary competitor.
The Chamber fully understands that within a fiscally prudent framework our ability to be reactive to tax measures announced in other jurisdictions is difficult. The Chamber believes that our primary priority must be to ensure that under the auspices of a single market, as created by the recently enacted Trade, Investment and Labour Mobility Agreement with Alberta, our relative competitiveness with Alberta must be a high priority for the Provincial Government.
With this in mind, The Chamber believes that the Provincial Government must commit to ensure that BC’s corporate tax rate does not exceed 125% the tax rate of Alberta. This cannot be a lowest case denominator; if BC can exceed this target then it is incumbent on the Provincial Government to enhance our competitive advantage by moving to reduce the provincial tax burden as low as possible within a framework of balanced budgets and fiscal prudence.
The need for action on the SME business tax rate is based on both a need to foster a competitive taxation regime, but equally important is the role action on this front will have on providing a foundation for SME’s to grow their business and their employment base. In short, SME’s need a competitive tax base as an enabler to grow and become the big business success stories of the future.
The role played by SME’s in providing goods and support services to the operation of the large companies mean they are critical to these businesses’ ability to remain competitive on a global scale. Without an efficient, competitive SME sector, many businesses would find it impossible to compete on the global scale as the cost of the goods and services provided by SME’s would negatively impact the cost structure of the large companies, quickly rendering them uncompetitive.
In short, the distribution of SME’s on both a geographic and sectoral basis ensures that they are a good indicator of the economic vitality and strength of the entire provincial economy. If SME’s are not flourishing, then neither can the province.
The Chamber believes that this leads to a very simple, incontrovertible truth; the future competitiveness of the provincial economy will depend upon the competitiveness of SME’s. This is not to suggest that the only role SME’s play is a support role. SME’s are also critical to the province’s export capability.
THE CHAMBER RECOMMENDS:
That the Provincial Government:
- publicly commit to a policy that ensures BC’s corporate tax rate does not exceed 125% those of Alberta;
- that Budget 2008 include a reduction of the small business tax rate from 4.5- 3%;
- increase the small business tax threshold from $400,000 - $500,000; and
- develop a comprehensive Small Business Strategy focused on reducing barriers to small business growth