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British Columbia Premier Christy Clark applauds as Finance Minister Kevin Falcon pauses while tabling the provincial budget at the B.C. Legislature in Victoria, B.C., on Tuesday February 21, 2012.

Darryl Dyck/ The Canadian Press/Darryl Dyck/ The Canadian Press

British Columbia is dropping out of a decade-long race with its chief provincial rivals to attract corporate investment with low tax rates, tabling a budget on Tuesday that proposes the first corporate-tax hikes since the B.C. Liberal Party came to power in 2001.

With a provincial election just 15 months away, the B.C. Liberals are taking on the challenge of rising program costs amid muted economic growth. In doing so, B.C. is setting out the stark choices facing other deficit-ridden provinces.

Finance Minister Kevin Falcon's answer is to forfeit corporate-tax bragging rights so he can put his government's target to balance the budget next year within reach.

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Posting a surplus in 2013 as required by B.C. law is key to maintaining the province's fiscal credibility, Mr. Falcon said in his budget speech in the Legislature. "Around the world, the landscape is littered with governments that have forgotten the importance of managing spending and taxation prudently."

Mr. Falcon's $44-billion budget forecasts a deficit of almost $1-billion, but aims for a small surplus just in time for the election in the spring of 2013.

To get B.C.'s finances back on track, the province will sell public assets, raise medical-service premiums and tobacco taxes, cancel this year's small-business tax cut and, two years from now, hike the general corporate tax by 1 per cent. "Everyone has to do their bit," Mr. Falcon told reporters.

The B.C. budget plan is a setback to Ottawa's efforts to brand Canada as a low-tax zone open to corporate investment. Finance Minister Jim Flaherty set a target of a combined federal-provincial corporate tax rate of 25 per cent and made his contribution by cutting the federal rate to 15 per cent this year.

Just as Canada approaches Mr. Flaherty's combined target, that marketing effort could be falling apart. Ontario is hinting at shelving plans to cut its rate further. Tuesday's move by B.C. could give Ontario some political cover as it prepares a budget next month that could alter its corporate-tax plans.

The B.C. corporate-tax hike, however, is only pencilled in for April 1, 2014. Mr. Falcon said he still hopes he can avoid the increase if the economy performs better than expected.

For the past five years, most provinces have held the line or reduced corporate-tax rates, although Quebec has gone against that trend with two successive hikes.

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But British Columbia and its chief rivals, Alberta and Ontario, have been in a race to offer the lowest corporate-tax rate.

Giving that up "underscores how serious we are about making sure we meet our target, and our requirement, to balance the budget in 2013-14," Mr. Falcon said.

Economist Jock Finlayson of the Business Council of B.C. expects the province will not fall far behind on corporate taxes, predicting that Ontario will abandon its plans for reductions in the face of a massive structural deficit.

"I would not anticipate capital fleeing B.C. for Ontario based on this budget," Mr. Finlayson said. "I think that era of tax reductions for individuals and businesses in Canada, I think that era has come to a close."

Mr. Falcon portrayed his budget as a restraint package, vowing to keep spending increases down to 2 per cent in each of the next three years. "It is tight, no question about it," he told reporters during a budget briefing.

Even so, spending will rise this fiscal year by $1-billion, leaving the province with a forecast deficit of $968-million in the coming fiscal year. There are some tax measures benefiting seniors and young families, but the impact will be slight.

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The province is introducing several new tax credits, including a grant of up to $10,000 on newly constructed homes for first-time home buyers. Seniors will be able to claim up to $1,000 for eligible home renovations. And families will be able to collect up to $50 for each child for fitness and art programs.

Health care accounts for the biggest rise in spending, but the rate is increasing at a slower pace than in past years, while education funds are effectively frozen with the exception of a $30-million fund this year for additional services to students with special needs.

The budget was widely criticized by unions and received only tepid support from business.

"It's a great budget for the 1 per cent," said Jim Sinclair, president of the B.C. Federation of Labour. He noted that families will pay more this year, while big business may, or may not, see a higher tax rate in 2014.

The B.C. New Democratic Party opposition said the budget takes aim at dealing with the government's political problems, not those of British Columbians. "I think these targets are unrealistic, they are set on a political timetable driven by two by-elections that are upcoming and the 2013 election," NDP finance critic Bruce Ralston said.

With a report from Bill Curry in Ottawa

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