BC to Raise Corporate Taxes
Amazingly, BCâ€™s government has joined its official opposition in proposing to restore the provincial corporate income tax rate from 10% to 12%.
The same government that cut from 12% to 10% would now reverse itself as part of a last-ditch effort to save the HST. Revenue from a higher corporate tax rate would help finance a lower HST rate.
According to BCâ€™s finance minister, â€œIt is clear that business is a major beneficiary of the HST and an honest rebalancing is viewed by the public as appropriate and reasonable.â€
A key argument for the HST, which removes sales tax from business inputs, has always been that business should be taxed not on its inputs but on its profits. I have long noted that an honest effort to put this principle into practice would combine the removal of sales tax from business inputs with higher corporate taxes on business profits.
However, the federal Conservative government called for all provinces to both adopt the HST and cut their corporate tax rates to 10%. The provincial governments of Ontario and BC followed these marching orders. The apparent goal was to make the largest possible fiscal transfer to the corporate sector.
Now that BCâ€™s opposition has successfully pushed back on the HST, the government is starting to follow the logic of its own argument, promising to combine the HST with a corporate tax increase. However, the reversal of BCâ€™s corporate tax cuts would not collect enough revenue to fully offset the removal of sales tax from business inputs.
Nevertheless, this development seems to improve the chances of BC restoring its corporate tax rate to a more appropriate level. More broadly, it weakens the narrative that corporate taxes must always and everywhere decline. The business lobbyâ€™s acceptance of the governmentâ€™s plan undermines its usual claims that raising corporate taxes would be unimaginably horrible.