FEREDE/HILL: Here’s why the Eby government should cut taxes in its upcoming budget

Tegan Hill is an economist at the Fraser Institute and Ergete Ferede is a professor of economics at MacEwan University.The British Columbia economy — and the living standards of British Columbians — have stagnated. In the last two years, B.C.’s per-person GDP, a broad measure of living standards, declined by an estimated 0.8% in 2023 and 2.1% in 2024 (after adjusting for inflation). To turn B.C.’s economy around, the Eby government needs a new bold approach when it tables its next budget in March. Fortunately, the government can heed lessons from the province’s past.In 2001, the provincial government cut personal income tax rates by 25% (on average) across all brackets, and B.C. went from having the second-highest top marginal personal income tax rate to the second-lowest in Canada. But in recent years, successive governments have reversed many of the 2001 tax cuts and raised personal income taxes on high-income earners. Now, B.C. has the fourth-highest top combined (federal/provincial or state) rate (53.5 per cent) in North America.Critics of tax cuts, especially cuts on top earners, often claim that tax cuts lead to massive revenue losses for government — and that governments shouldn’t cut taxes during periods of deficits. However, a new study published by the Fraser Institute examines the revenue effects of B.C.’s 2001 personal income tax cuts and finds that they had positive economic effects. Specifically, the study found that a 1% cut in the top personal income tax rate leads to a 0.75% increase in taxable income in the short term.In other words, when government cuts taxes, people are more likely to engage in income-generating activities such as work and investment, which leads to a broader tax base, more economic growth and more revenue for government coffers. Put simply, the positive economic response from tax cuts can offset some of the revenue losses.The study also compared actual government revenues (after the 2001 tax cuts) with projected revenues if the government had not made the cuts. It found that revenue losses were smaller than initially feared. The provincial government initially faced some drop in revenue, but thanks to the pro-growth tax cuts the economy rebounded strongly, and by 2007 the revenue loss had diminished to just $590 million or roughly 8% of the government’s budget. Clearly, tax cuts can be self-financing to some extent, as they stimulate economic activity and increase overall tax revenues over time.Which brings us back to the Eby’s government’s upcoming budget. Remember, the B.C. economy has stagnated and living standards in the province have declined over the last two years. Now is the time for the government to help kickstart the economy with bold moves.According to the new study, if the government cut the top provincial income tax rate from 20.5% to 14.7%, it would only forgo $117 million in the first post-cut year. By the fifth year, the loss would grow modestly to $457 million. For perspective, the B.C. government’s total projected revenues will eclipse $81 billion in 2024/25. At that new top tax rate, B.C. would enjoy an advantage over most other Canadian provinces in attracting and retaining high-skilled workers who drive prosperity and job-creation. Given the potential to increase economic activity, attract investment and boost employment, the long-term benefits far outweigh these relatively small initial revenue losses.In summary, a well-designed tax cut could help stimulate economic growth without a huge hit to the budget. It’s time for the Eby government to consider the lessons of the past and embrace a future of lower taxes, greater prosperity and a more competitive B.C.Tegan Hill is an economist at the Fraser Institute and Ergete Ferede is a professor of economics at MacEwan University.

FEREDE/HILL: Here’s why the Eby government should cut taxes in its upcoming budget

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