Over the last five years, the British Columbia government has raised taxes on the province’s top income earners including doctors, entrepreneurs and businessowners. While these tax increases were meant to generate more revenue for Victoria to provide public services, they’ve simply made the province less attractive to high income earners and have likely done little to generate more revenue.
Here’s what happened. From 2018 to 2020, with two separate tax hikes, the Horgan government increased B.C.’s top personal income tax rate from 14.7 per cent to 20.5 per cent.
Additionally, in 2016 the Trudeau government increased the top federal tax rate by four percentage points. As a result, B.C.’s top income tax rate increased from 43.7 per cent in 2015 to 53.5 per cent today.
So what’s the result? How have these tax hikes affected British Columbians?
Firstly, they reduce the incentives for additional productive economic activity, which undermines long-term economic growth. Consider this. In 2015, before the provincial and federal tax hikes, to increase their take-home pay by $100, British Columbians facing the top marginal income tax rate had to earn an additional $178 compared to $215 today.
In addition to weakening incentives for work and production for people already living and working in the province, such high tax rates make it harder for B.C. to attract mobile high-skilled workers who have lots of choices about where to live.
Of course, taxes aren’t the only factor that determine where people choose to live, but for high-earning individuals who see a large share of their income taxed at that rate, high tax rates make B.C. less attractive compared other jurisdictions including U.S. states with much lower tax rates. In the global race to attract and retain doctors or businessowners who fuel the economy and create jobs, tax policy is key.
In fact, at 53.5 per cent, B.C. now has the fourth-highest top personal income tax rate in Canada and the United States. The top marginal rates in the neighbouring states of Alaska and Washington are 16.5 percentage points lower than B.C.’s since neither has a state-level personal income tax.
Secondly, it’s not clear B.C.’s high tax rates even achieve the stated goal of generating substantial new government revenue.
Because high tax rates reduce incentives for production and dampen economic growth, which shrinks the size of the underlying tax base. This, in turn, can undermine the goal of raising more revenue. Indeed, a growing body of evidence suggests recent provincial and federal tax increases in Canada aren’t producing much more money for governments. In other words, governments have created economic pain for little if any gain.
If the new Eby government wants to improve economic growth and make the province more attractive to skilled workers, it should lower the top personal income taxes on British Columbians.
Ben Eisen and Jake Fuss are economists at the Fraser Institute.