Campbell's Tax Cuts Failed to Work

For a decade now, we have been told over and over that cutting corporate taxes will stimulate investment and create jobs.

In B.C., Gordon Campbell's government has steadfastly maintained that if you simply reduce corporate taxes, companies will respond by performing in the interests of British Columbians. "Under a BC Liberal government," Campbell said, announcing his sweeping 2001 tax cuts just days after being elected, "British Columbia is once again going to be the destination province where people and businesses want to move and invest."

Similarly, that was Campbell's line last year when he sprang his unwelcome surprise plan to harmonize B.C.'s sales tax with the federal goods and services tax. The HST shifts $1.9 billion in taxes away from corporations on to the shoulders of average families. Said Campbell in a July 23, 2009 news release: "This is the single biggest thing we can do to improve B.C.'s economy. This is an essential step to make our businesses more competitive, encourage billions of dollars in new investment, lower costs on productivity and reduce administrative costs to B.C. taxpayers and businesses. Most importantly, this will create jobs and generate long-term economic growth that will in turn generate more revenue to sustain and improve crucial public services."

After nearly ten years, it seems fair to evaluate this oft-repeated claim, which has, after all, formed the cornerstone of the B.C. Liberals' economic policy from Day One. Have we in fact seen significantly higher levels of investment than during the 1990s? Have we seen substantial job creation?

Unfortunately for most citizens of the province, the answer to both questions is "no".

Little evidence of jobs or investment

Since 2001, the government has repeatedly cut corporate taxes in B.C. And it plans to reduce them even more. Recently, nine months after first announcing the HST, the government asked University of Calgary economist Jack Mintz to project its effects on future jobs and investment. Mintz also reviewed the government's past record. "Over the past decade," he said, "British Columbia has taken a large number of steps to makes its economy more tax competitive. These steps have included reductions in the general corporate income tax rate from 16.5 per cent in 2001 to 10.5 percent today (with a planned further reduction to 10 per cent by 2011). British Columbia has also eliminated its capital taxes and reduced property taxes, especially for major industries. . . " And as part of the 2008 carbon-tax package, Mintz adds, "corporate income tax rate was reduced to 10.5 per cent, effective 1 January 2010 and the rate will be reduced further to 10 per cent, effective January 1, 2011."

In addition, Mintz notes that the federal corporate income tax rate has also been reduced, with further cuts planned. The federal tax rate on corporations was 19 per cent in 2009, and "will decline to 15 per cent by 2012 (although the federal government will be phasing out certain tax preferences as it reduces the tax rate during this time)." Mintz, echoing the Campbell line, suggests that all these reductions in corporate income taxes "will further enhance British Columbia's investment climate."

It's too bad that the Campbell government didn't ask Mintz to evaluate the impact of past tax cuts on investment and employment creation. Had he done so however, he would have been obliged to conclude that investment and employment in British Columbia have stagnated and that recently, despite all those tax cuts, jobs and capital spending have fallen sharply. Corporations are making profits in B.C. But they are clearly not reinvesting them here in this province.

From 2001 to 2009, Statistics Canada data indicates that private investment in machinery and equipment in B.C. grew by only $166.1 million. That's an annual growth rate of just 0.26 per cent per year. This is what all those tax cuts have actually coaxed out of corporations.

The disappointing results of the tax-cut strategy can be seen in both the tepid growth of output and the slow pace of job creation. The Liberal record in these departments actually trails that of the previous government. While the New Democrats were in office between 1991 and 2001, manufacturing output grew by 88 per cent. Excluding the forest sector, growth was 106 per cent during that decade. Since then, manufacturing growth fell to just one per cent, while non-forest sector manufacturing saw growth of just 30 per cent.

Job creation doesn't seem to have benefited much from all those tax cuts, either. Total employment across the B.C. economy grew by 2.8 per cent per year from 2001 to 2008, says BC Statistics. That's slightly higher than the 2.4 per cent annual average under the NDP. But with the loss of over 150,000 jobs in 2009, that average is now down to 2.1 per cent per year.

In manufacturing, the record under the Liberals' low-corporate-tax regime is even worse. While manufacturing employment grew by 1.6 per cent per year under the NDP, it fell by 0.5 per cent per year from 2001 to 2008. And with the loss of nearly 25,000 manufacturing jobs in 2009, the province has now bled an average of 1.9 per cent of its manufacturing jobs each year Gordon Campbell has been Premier.

B.C.'s forest sector on the ropes

Nowhere can the Campbell tax cuts' impact on employment and investment be better seen than in the forest sector, B.C.'s largest source of employment and export earnings when Campbell became premier. Investment in solid-wood manufacturing averaged over 30 per cent more per year under the province's former NDP government than under the current government, according to Statistics Canada data. In the NDP's nine years in government, annual investment in wood manufacturing and pulp and paper averaged $845.2 million. But in the first seven years under Gordon Campbell's Liberals that fell to $648.7 million, a difference of 30.2 per cent.

Investment in wood manufacturing in 2008 was nearly $80 million less than in 2001, a fall of 6.1 per cent per year. In fact, investment in the sector has fallen every year since 2005. And the overall forest sector today employs 36,600 fewer people than in 2001, a decline of 41.3 per cent. Even without the effects of the recession, by 2008, the forest industry had already lost 23,700 jobs under Campbell's tax regime.

As Campbell's tax cuts have failed to deliver the surge of investment promised, another key to B.C.'s future has flagged as well: productivity. B.C.'s performance is "even worse" than Canada's lackluster performance, according to a 2008 study (see sidebar).

A failed policy adventure

Since 2001, the citizens of our province have essentially paid corporations billions of dollars to invest in this province and create jobs. In 2000-01 for instance, B.C. collected personal income tax that came to 4.5 per cent of GDP, according to Iglika Ivanova of the Canadian Centre for Policy Alternatives. By 2008-09, that fell to about three per cent of GDP. The loss in personal income tax revenue of 1.5 per cent of GDP amounts to roughly $3 billion per year (B.C.'s GDP is just under $200 billion). Wealthy taxpayers got a vastly disproportionate share of those benefits -- individuals with incomes of over $250,000 a year constitute just one-half of one per cent of all taxpayers but they got 12.5 per cent of the 2001-02 tax cut and 2.5 per cent of the 2007-08 cuts.

In addition says Ivanova, in 2000-01, B.C. collected corporate income tax of about 0.8 per cent of GDP. In 2008-09, corporate tax revenues are estimated to be one per cent of GDP, but they're projected to fall to 0.5 per cent of the GDP by 2011-02. This would represent a loss of 0.3 per cent of GDP, or just under $600 million per year. The difference, she notes, "is approximately the revenue lost -- if we collected as much taxes as we did in 2001, we'd now have an extra $3.6 billion per year."

That's in addition to the cost of the federal corporate tax cuts, which CUPE senior economist Toby Sanger says will require Canadians to forego $8.6 billion in revenues this year, rising to almost $15 billion in 2013-14. And for companies based in the United States, corporate tax cuts below a combined federal-provincial rate of 35 per cent don't even benefit the companies -- they go instead to the U.S. treasury, so there isn't even a theoretical reason why corporate income tax cuts would be an incentive to invest in Canada.

These tax expenditures, essentially payments to corporations and the wealthy in the expectation that they will use their tax windfalls invest and create jobs here, have been provided by a provincial government that obviously believes that lower taxes equal more jobs and investment. But corporations haven't delivered.

Premier's empty promises

What we have in fact is the "three amigos" scenario writ large. In 2003, the CEOs of three major coastal forest company were locked in difficult contract negotiations with the Industrial Wood and Allied Workers of Canada, which since merged with United Steelworkers. The CEOs of Interfor, Weyerhaeuser and TimberWest launched a public relations blitz, loudly promising communities that, if the companies were to get their way with their employees and a few other concessions from the government (market-based stumpage, new laws governing land use and forest practices), then corporations would invest a billion dollars in new mills and create thousands of jobs.

The Campbell government quickly delivered. But the companies failed to live up their end of the deal, ultimately closing many of their B.C. mills. They spent hundreds of millions of dollars, not here, but in the U.S.

Now we can see this wasn't at all an isolated case. It's the pattern for Campbell's approach to the economy. Give corporations what they say they need, get out of the way, let markets work their magic and the wheels will turn, the cash will roll in.

Speaking at the Truck Loggers' Association convention in 2002, Campbell said his plan "is backed up by a belief that people in this province are energetic and creative, and that if we allow them to compete, they will win." The actual result in the forest sector has been a wasteful and destructive race to the bottom in a largely contracted-out and deregulated industry where,instead of investing and creating employment, most companies divested, especially in manufacturing. Now they increasingly rely on raw-log exports rather than sawmills, pulp and paper or other value-added plants.

In that same speech, Campbell said: "We are going to have an industry that is a cornerstone of economic growth and prosperity. If we don't have a forest industry that's vital -- a forest industry that attracts investment, a forest industry that sustains jobs -- we are not going to have the resources we need to sustain excellent health care, excellent education and other public services."

Certainly, Campbell was wrong about revitalization of the forest industry. On his watch the sector has tanked; in fact, it tanked well before the global economic crisis, as the numbers indicate. But he was right about the consequences. With declining revenues from the resource sector, B.C.’s economy, government sector and civil society will all be severely impacted.

Revenues, services, communities in decline

The process is already well advanced, of course. Last year's budget forecast $387 million in forest resource revenues. The revised estimate in this year's fiscal update was $345 million. Ministry of Forests officials indicate the actual figure is much lower. That revenue is supposed to provide forestry's contribution to health care, education and other vital services. But current revenue compares very poorly to past years. In 2001, for instance, forest resource revenues were $1.12 billion. And worse, while in the last year of the NDP forest revenues were more than double ministry spending, the cost of managing the forests now exceeds forest revenues. Last year ministry expenditures were $641 million, 53.8 per cent above revenues.

Is it any wonder minister Pat Bell was in the front of the line for the big budget axe?

B.C.'s declining prosperity can also be seen in lumber exports, historically the main driver of our economy. From 2001 to 2008, lumber exports fell from $6.5 billion to $3.6 billion. Last year they fell even more: 2009 lumber exports are 58 per cent below 2001. When the industry is healthy, those revenues pay employee wages and provide a return on investment. In turn, employee and company spending helps our communities to thrive, puts kids through school and allows people to retire in dignity. They also pay the taxes that finance our public services, community organizations and leisure activities. When the incomes generated by lumber exports fall, British Columbians are poorer, both individually and as a society.

This decline in resource revenues is not the result of bad luck, although the current government would have us to think so. No, it's the result of a concerted policy of allowing corporations in the forest industry and other sectors to pay very little in the way of taxes, do pretty much what they like and ignore the need to reinvest back into communities in the form of new means of production, more research and development or improved productivity.

Corporations disinvesting in British Columbians

And ultimately, it won't be corporations that pay the biggest price of these years of neglect. In the B.C. forest industry, many of those firms are already disinvesting from this province in the apparent anticipation of getting out. Weyerhaeuser has sold most of its forest lands and licenses and is mostly out already. Interfor has nearly completely abandoned the coast, while investing millions in Washington and Oregon. TimberWest shut down all its manufacturing operations and operates as a raw-log exporter and real estate concern. Just five B.C. firms invested more than one and a half times as much in solid wood production in the U.S. between 2002 and 2006 as the entire B.C. forest industry invested here during the same highly-profitable period. Even with pulp and paper investment included, those five companies invested $3.3 billion in the U.S., while overall B.C. forest-sector investment totaled just $3 billion.

Sadly, the losers will be the people of this province. We're already paying -- not just in foregone tax revenue but also in the form of declining job opportunities, falling revenues, service cuts in health care, education and other important programs and a general deterioration in our communities, neighbourhoods and living standards.

If the Campbell government's addled approach to economics is allowed to continue, we will see much, much worse before we see better. In fact, we'll keep on seeing worse until we demand that government be more than just a cheerleader for the private sector or a machine for funneling tax dollars from us to them.