Why the NDP’s Tax Cut Promises Will Hurt BC

In the B.C. election, significant tax cuts were promised by both the Conservatives and the NDP. While they were framed as a way of easing pressures on the cost of living, tax cuts would do little to address the structural problems underlying those cost pressures.

Now that the election has been decided, we can take a closer look at the impacts of the tax cuts the NDP proposed during the campaign.

More tax cuts would erode the province’s capacity for public investments to tackle some of the big challenges we face: housing, health care, child care, poverty, toxic drugs and the climate crisis, among others. Tax cuts would ultimately deepen the affordability challenges they purport to help.

Neoliberal tax and spending cuts

Tax and spending cuts of the neoliberal era are among the key causes of the significant social challenges we face today. In the early 2000s, the BC Liberal government made cuts to public services and large across-the-board personal and corporate tax cuts that disproportionately benefited the rich.

The harms of cuts to public services were widespread. In the K-12 system, schools closed by the dozens and class sizes grew.

Thousands of health-care support workers saw their jobs privatized, leading to large wage cuts and degraded working conditions and service quality for patients. The BC Liberal government of the day largely got out of the business of building affordable housing, helping to set the stage for the housing shortage today. The Liberals also failed to invest adequately in affordable child care and underinvested in infrastructure, even selling public lands needed for schools and hospitals.

Following these cuts, the role of public spending in B.C.’s economy was seriously diminished. As a share of GDP, provincial government operating spending dropped sharply in the early 2000s and still remains lower today than it was 25 years ago. This is despite some important reinvestments in social programs since the BC NDP formed government in 2017.

By the 2023-24 fiscal year, provincial operating spending stood at 20.7 per cent of GDP, down from 21.5 per cent in 1999-2000.

This belies corporate and right-wing claims that B.C. is engaging in “reckless” spending.

Core provincial government staffing levels per capita also remain substantially lower than they were a quarter century ago, falling from 1.06 full-time equivalent, or FTE, staff per 100 British Columbians in 1999-2000 to 0.83 FTE in 2023-24, up from a low of 0.71 FTE per 100 residents in 2005-06. (The reporting does not include staffing in schools, universities, colleges and hospitals.)

The revenue side of provincial finances tells a similar story. Provincial revenues as a share of GDP dropped sharply after the tax and spending cuts of the early 2000s, and they haven’t recovered since. Revenue stood at 19.4 per cent of GDP in 2023-24, still down from 21.4 per cent in 1999-2000. This metric helps show that, as a society, British Columbia has the option to dedicate more of our total economic pie to solving difficult challenges through our shared institutions of government, if we choose to do so.

After the BC NDP took office in 2017, the government did shore up revenue by bringing in small tax increases on high-income earners, corporations and the high end of the housing market.

However, this was offset by a large tax cut in the form of eliminating unfair Medical Services Plan premiums. It was a welcome change, with lost MSP revenue only partly replaced by a new employer health tax (similar to that found in other large provinces).

Taken together, these tax policy changes under the NDP were an important step forward for tax fairness, but they netted no structural increase to provincial revenues.

Another element of B.C.’s fiscal situation relates to provincial capital spending on infrastructure like schools, hospitals, roads and transit. Capital spending doesn’t affect the budget balance in the same way as operating spending. Borrowing is used to finance capital investment and is repaid gradually over the course of the life of an asset, with costs spread over many budget years.

Capital spending has increased substantially in recent years, reflecting the need to catch up on long-neglected infrastructure investment. Given the flurry of infrastructure promises on all sides in the provincial election, political parties now seem to agree on the importance of catching up on infrastructure investment (though not necessarily on the types and specific projects to be prioritized). Infrastructure investment is widely seen as a necessity and has clear long-term economic benefits. Failing to invest adequately in infrastructure now would only damage B.C.’s economy and revenues in the longer term.

BC has room to spend more — for now

If increased public investment is needed to meet the challenges B.C. faces, the question arises: Can we afford it? The short answer is yes. But in the longer term, that must include raising more revenue.

B.C. is running substantial operating deficits. In the election, the NDP and Conservatives both said they would continue running deficits in the years ahead while aiming to balance the budget over time.

Running deficits is reasonable in the coming years and is well justified right now to help support demand in a weakening Canadian economy. B.C. has retained the best set of credit ratings of any province in Canada, despite projecting substantial deficits. B.C. also has among the lowest debt-to-GDP ratios of the provinces, leaving considerable room to manoeuvre, particularly when borrowing to catch up on investment in infrastructure. Currently projected deficits may also be overstated as there are over $10 billion in contingency funds built into B.C.’s budget framework over the next three years.

Moreover, running fiscal deficits is far preferable to shortchanging public investment, which would only deepen social and environmental deficits and cost B.C. and its economy more in the long run.

Does this mean that B.C. should plan to run large deficits indefinitely?

No.

Proposed tax cuts a step backwards

To sustain and increase important public investments in the years ahead, B.C. should increase provincial revenues as a share of GDP. The government certainly shouldn’t create long-term reductions in provincial revenues with tax cuts. Yet, that was put on the table in the recent election.

The BC NDP’s proposed “middle-class tax cut” would cost an estimated $1.3 billion on full implementation in 2026-27. This tax cut takes the form of a $10,000 increase to the basic personal amount exempted from provincial income tax, though it would be phased out for people with incomes above $125,000 a year. (This is according to media reports. The policy details were not specified in the party election platform or news release.)

More immediately, in the coming fiscal year, the NDP proposed an interim rebate that would cost an estimated $1.8 billion. The higher cost in the first year likely reflects that the interim rebate would flow to some lower-income households that wouldn’t benefit from the eventual tax cut (because they don’t pay enough provincial income tax), though this isn’t spelled out in the platform. The revenue loss from the proposed NDP tax cut is offset marginally by an increase to the speculation and vacancy tax that would add an estimated $60 million in revenue annually.

Notably, the $1.3-billion annual hit to provincial revenues is much smaller than the income tax cut the Conservatives proposed (an estimated $3.5-billion cost for the “Rustad rebate” on full implementation), but the NDP cut is still significant on the scale of the $90-billion provincial budget.

Moreover, neither party’s proposed tax cuts are designed particularly fairly. First, those with lower incomes wouldn’t receive the full value of income tax cuts since they pay less provincial income tax to begin with. The Rustad rebate would have been even less fair since those with higher mortgage payments or rents (and likely higher incomes) would have received larger tax cuts under the policy.

Finally, one other consideration is that the NDP has proposed eliminating the consumer portion of the carbon tax if the federal requirement is removed in the future. This remains a hypothetical and is unlikely to occur before the next federal election, so the issue isn’t likely to arise in B.C.’s next budget (but could come up by the 2026 budget). This would erode provincial revenues further.

Raising revenue by taxing the rich

Instead of more tax cuts, B.C. should pursue policies to tax the rich and large corporations more robustly. Shoring up the tax base in this way would have the dual benefits of tackling inequality and helping fund key public investments that can meet the challenges facing British Columbians.

Income inequality in Canada recently hit a new record by one important measure — the largest recorded gap in disposable income between the top 40 per cent and bottom 40 per cent — and wealth inequality is at extreme levels, including a huge gap between renter households and those who own real estate.

The idea of increasing provincial revenues is not pie in the sky. B.C. remains a low-tax province. Even credit rating agencies like Moody’s have repeatedly noted that B.C. has “flexibility to raise taxes if necessary while still remaining competitive with other jurisdictions.”

Taking steps towards restoring provincial revenues to the share of GDP that B.C. had 25 years ago would greatly boost fiscal capacity. As discussed above, provincial government revenue stood at 19.4 per cent of GDP last fiscal year, down from 21.4 per cent of GDP in 1999-2000.

If last year it had been at the earlier level of 21.4 per cent of GDP, that would have meant $8.2 billion in additional available revenue.

There are numerous ways to restore provincial revenues as a share of GDP, including higher taxes on wealthy landowners, large corporations and those with the highest incomes. Moving in this direction would build on the modest but important steps already taken by the NDP government to improve tax fairness. The BC Green platform also notably called for inequality-reducing tax policies of this kind.

But the government’s planned provincial income tax cut (increasing the basic personal deduction amount) would only deepen the revenue-raising challenge. If this policy does go ahead, it should phase out at a lower income level than $125,000 and be designed so that benefits will flow to those with low incomes who don’t pay provincial income taxes to begin with.

Better yet would be to put the $1.3-billion cost of the planned tax cut towards programs that serve low- and middle-income people and towards increases in existing income-tested transfers like the climate action tax credit. If the tax cut does go ahead, it should be paired with raising new revenue from taxes on the rich and large corporations.

Increased economic growth can also contribute to raising provincial revenues (though it certainly can’t do the whole job). Policies to address the housing crisis, build out infrastructure and transportation networks and create a universal child-care system can help increase economic growth and productivity.

B.C. is a wealthy, but highly unequal, province. Tax and spending cuts of the early 2000s deepened inequalities and eroded the government’s capacity to meet people’s needs and tackle big challenges. Rather than diminishing the capacity of our public sector with more tax cuts, B.C. should restore that capacity.