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Biz to BC Libs: Thanks a Billion!

Corporate windfall hits milestone. And why the pre-election budget wasn't truly balanced.

By Will McMartin 26 Sep 2005 |
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Finance minister Carole Taylor's September 14, post-election mini-budget slashed corporate taxes by $163 million over a full fiscal year. When that amount is added to earlier business tax-reductions enacted since 2001 by her BC Liberal predecessors, Gary Collins and Colin Hansen, total business-sector tax savings exceed one billion dollars annually.

Collins started the corporate windfall in the summer of 2001 when he unveiled corporate tax cuts totaling $770 million annually. The measures included phasing out the corporation capital tax for non-financial companies; social service (sales) tax exemptions for production machinery and equipment; and a reduction in the corporate income-tax rate from 16.5% to 13.5%.

He followed with business tax reductions of $15 million in 2002-03, $26 million in 2003-04 and $65 million in 2004-05. Among those cuts included a sales tax exemption for machinery repairs; extension of the scientific research tax-credit; and corporate-income tax-reductions and incentives for film and animation production, new media, mining exploration and book publishing.

When Collins quit politics in the fall of 2004, the cumulative, yearly total of his business tax cuts was $876 million.

Hansen followed with a 2005-06 budget which raised the threshold for both the small-business corporate-income tax and the sales-tax on luxury vehicles, increased corporate-income tax credits for film production, and gave a school-tax exemption for hydro-electric projects. The annual cost of his corporate tax reductions: $24 million. Between the two of them, Collins and Hansen lowered the tax burden for BC businesses by $900 million - annually. (The tax cuts, with the exception of credits for mining and scientific research, are not temporary or short-term initiatives; they remain in effect, year after year, until changed by the legislature.)

Taylor's inaugural budget further trimmed the corporate-income tax-rate from 13.5% to 12%, and provided a new tax credit for the commercialization of life sciences. The full-year cost of these measures is $163 million.

When Taylor's cuts fully kick-in next year, 2006-07, BC businesses will be saving $1,063,000,000 annually, compared to what they paid before the BC Liberals were elected to government.

'Students and workers, incorporate!

Those never-ending business tax cuts do not pay for themselves, of course. Since 2001, the BC Liberal government has recouped the cost of their lowered corporate levies - and more - by hiking taxes and fees paid by unincorporated British Columbians.

For example, Taylor's budget shows that post-secondary tuition fees, 'unfrozen' by the BC Liberals four years ago, will generate $904 million this year - exactly double the $452 million raised in 2001-02.

Government revenue from Medical Services Plan premiums in the current year is pegged at more than $1.4 billion - up $484 million since the BC Liberals first won election to government and hiked premiums by 50%.

In 2003, Premier Gordon Campbell went on province-wide television to announce a 3.5-cent per-litre increase in the fuel tax, which this year will generate $915 million - $256 million more than when Campbell took office.

Finally, BC Lottery Corporation profits, all of which flow into the provincial treasury, will surpass $1 billion in 2007-08, compared to just $598 million in 2001-02. The BC Liberals won power in 2001 after promising to stop gaming expansion.

These four sources alone generate an additional $1.5 billion annually following fee, premium, tax and policy changes by the BC Liberals.

Meet the new NDP boss, same as the old....

Despite new leadership pledged to a new approach to politics, the NDP opposition had a predictably apoplectic response to Taylor's corporate tax cuts. In Question Period on September 15, the day after release of the mini-budget, New Democratic Party MLAs fired 11 queries at BC Liberal cabinet ministers, and every one blasted the government for lowering business taxes.

Leading the way was NDP leader Carole James with three questions predicated on the notion that the BC Liberals should have told voters that the corporate-income tax-rate would be lowered to 12%. She was followed by finance critic Jenny Kwan, who asked two questions on the same theme, and then by children and family services critic Adrian Dix, whose two questions focused on "a big corporate tax cut that nobody asked for." Next was Mike Farnworth, economic development critic - economic development! - with two questions repeating Dix's charge that Taylor had delivered a "corporate tax cut that the corporate community didn't ask for." And the last two questions went to Katrine Conroy, critic for seniors' health, who alleged that the corporate tax cut was a betrayal of both seniors and crystal meth addicts.

The New Democrats' manifest antipathy for business and corporate tax cuts was in sharp contrast to James's pre-election pronouncements when she declared her commitment to opening a new chapter in provincial politics. In July 2004, at a well-publicized meeting with the Coalition of BC Businesses, James said that "political polarization and pendulum politics have too often gotten in the way of working together.

"I have made it a top priority to meet with business people," she said, "to hear from you directly and to learn from your experience as business leaders. I believe New Democrats and the business community share a lot more in common than is often assumed."

She concluded: "We will reach out and work with businesses that are excited about investing in modern opportunities for growth and prosperity. ... I believe that if we all apply sufficient resources and resolve, that common ground can be found."

Then, this past spring, James surprised many observers by criticizing previous BC governments - including NDP administrations - for a lack of balance. "It's time to end... polarization." she said.

Well, that was then. BC's 38th parliament, like many before it, evidently has a pro-business, pro-tax cuts party ensconced on one side of the aisle, and an anti-business, anti-tax cuts party on the other. Polarization, once thought to be dead, is alive and well in the Legislative Assembly.

The BC Liberals' pre-election budget was 'balanced' -or was it?

Was the first budget for 2005-06 - the one introduced by former finance minister Colin Hansen three months before the provincial election, and whose estimates were never debated in the legislature - really 'balanced'? A recent analysis by the Dominion Bond Rating Service (DBRS) suggests that it actually had a deficit of $856 million.

The story starts in the spring of 2004, when Victoria finally implemented 'generally accepted accounting principles' (GAAP). The move had been recommended by the auditor general and the Canadian Institute of Chartered Accountants, and promised by the BC Liberals before the 2001 general election.

Under GAAP, the province's financial statements must include a wide array of public entities which receive most of their funding from Victoria. This means that rather than relying solely on the Consolidated Revenue Fund (CRF, which is the government's main spending account) to illustrate annual revenues and expenditures - and reveal a surplus or a deficit between the two - the public can now see a broader picture, which includes the CRF, all Crown corporations and agencies, and the SUCH sector (schools, universities, colleges and health authorities).

This is a positive move, because in the bad, old days B.C. governments occasionally succumbed to the temptation of removing certain expenses from the CRF and hiding them elsewhere (as W.A.C. Bennett did with 'contingent liabilities' and the New Democrats did with the BC Transportation Financing Authority), or setting up magical funds to create fictitious revenues (as Social Credit did with the Budget Stabilization Fund). GAAP reveals all revenues and expenditures, in their entirety, so it is impossible to mislead the public.

Or is it? Consider two other factors. First, GAAP amortizes capital expenditures over the useful life of the asset being built or purchased; and second, B.C. utilizes 'accrual' accounting. Simply, total government spending sometimes may be portrayed as much lower than it is in reality.

Earlier this month, the DBRS released an exhaustive study of Canada's federal and provincial government finances, and offered an interesting comment on the BC Liberals' pre-election 2005-06 budget. Then-finance minister Colin Hansen boasted that the budget had a $220 million surplus with a $400 million 'forecast allowance,' but refused to debate the budget's estimates in the legislature.

Here, in part, is what DBRS wrote about Hansen's fiscal plan: "[British Columbia] is budgeting for a second consecutive balanced budget in 2005-06, although adjustments made by DBRS to recognize capital expenditures on a cash basis will result in a DBRS-adjusted deficit of $856 million."

So there it is. Under GAAP's accrual system, the BC Liberals' pre-election budget had a surplus of several hundred million dollars, but under the DBRS cash analysis there was a deficit of nearly a billion dollars. Would the election outcome have been any different if the latter accounting system was used, rather than the former?

Ramping-up capital spending because it doesn't really count

GAAP also helps to explain the Campbell government's enthusiasm for ramped-up capital expenditures. According to Taylor's budget and fiscal plan, capital spending over this year and the next two will rise $1.1 billion above what Hansen had planned just last spring. Much of the additional spending will go toward university and hospital construction, as well as the over-budget - and rising - Vancouver Convention Centre Expansion Project.

Fiscal surpluses - much due to windfall payments from Ottawa - will pay for some of those capital costs, but under GAAP a lot will be amortized over future years. So, even while the government boasts of budget surpluses, the provincial debt is projected to continue climbing in the foreseeable future.

Will McMartin has been a political consultant to several parties and contributes analysis regularly to The Tyee.  [Tyee]

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