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B.C. Premier John Horgan and Finance Minister Carole James are shown in this Sept. 8 photo.

Chad Hipolito/THE CANADIAN PRESS

Lindsay Tedds is an associate professor of economics in the School of Public Administration at the University of Victoria and a research fellow at The School of Public Policy, University of Calgary. She writes a blog deadfortaxreasons.wordpress.com and can be found on twitter @LindsayTedds.

B.C. Finance Minister Carole James's budget update this week outlines what many have been indicating for months; B.C.'s economy is leading the pack in terms of economic growth in Canada, albeit mostly because of the housing sector. The end result is strong tax-revenue forecasts over the short term that have allowed both increased spending and surpluses by the new NDP government.

In terms of the bigger picture, there are two important things to note. First, there are certain risks around the numbers upon which this update relies, including interest rates, softwood lumber, the renegotiation of the North American free-trade agreement (NAFTA), wildfires, the Insurance Corporation of British Columbia, BC Hydro, public-sector compensation and a new government implementing fresh and not fully planned initiatives. As a result, not only has the government set aside the usual $300-million forecast allowance, but also $600-million to fund any unexpected pressures. Including the anticipated $246-million surplus, this means nearly $1.15-billion is set aside for "fudge factors" for 2017-18 alone, a substantial amount of money given that this budget update also includes tax increases.

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Second, the update shows a growth in taxpayer-supported debt and self-supported debt over three years. The net effect on the taxpayer-supported debt-to-GDP ratio, the measure of the ability to pay the accrued debt is negligible, holding at about 16.2 per cent to 16.3 per cent of GDP, owing to the strong growth in the province.

However, taxpayer-supported debt-to-revenue ratio is forecast to rise above 90 per cent. While this is because of spending on what the Finance Minister called priority infrastructure, it could lead to a decline in the province's credit rating, driving up the borrowing costs on the provincial debt and eating into the above noted fudge factor.

In terms of announcements, there are three important ones from a tax perspective. First, the NDP government is keeping its commitment to reduce the regressive Medical Services Plan (MSP) premium by 50 per cent effective Jan. 1, 2018. This decrease was announced in the Liberal government's February budget. However, the original implementation of this reduction was so administratively complex that the added cost to the government, employers and British Columbians was shocking.

Instead, this government is abandoning that complexity and administering a simple across-the-board reduction, regardless of income, and raising the threshold at which the premium kicks in. This means that individual British Columbians, who are the last in Canada to pay a stand-alone health premium, will save up to $450 a year or $900 a year for couples. This is an excellent first step in eliminating a regressive and an administratively costly tax. Further, the government will establish a task force to report in the spring on how to eliminate the full MSP.

But while the government gives with one hand, it takes with the other. The NDP is proceeding with an income-tax increase on individuals earning more than $150,000 year, to 16.8 per cent from 14.7 per cent, as outlined in its election platform. According to tax filer data, this will affect about 3 per cent of tax filers in the province. The magnitude of the tax increase will depend on how much you earn. For example, someone earning $175,000 will pay an additional $525, whereas someone earning $300,000 will pay an additional $3,150. However, depending on the make-up of the household and the earnings of the individuals in it, together the tax increase and the MSP reduction could result in an overall tax savings. Given the substantial fudge factor in this budget update, I question that need for this tax increase at this time.

The NDP government is also proceeding with an increase in the general corporate-tax rate. The rate is going from 11 per cent to 12 per cent, but, again, this is partly offset by the benefits gleaned by eliminating the PST on taxable electricity. In fact, the combination of a general rate increase plus the PST elimination on electricity was a recommendation made by the Liberal government's Tax Competitiveness Commission, which reported last fall. In addition, the small-business tax rate is being reduced from 2.5 per cent to 2 per cent, likely as an offsetting measure for the recent minimum-wage increase to $11.35.

However, the timing is unfortunate given that the reduction in the small-business tax rate exacerbates the concerns around the tax measures on which the Department of Finance in Ottawa is currently consulting.

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Finally, and likely not on the radar by anyone other than someone interested in tax compliance, the budget announces important information-sharing between the Income Tax Act and the Home Owner Grant Act for the purposes of tax administration and enforcement. There are real concerns related to fraudulent claims for the Home Owner Grant by those who do not satisfy the principal residency requirements, notably when homes are rented out. This is an important step in cracking down on tax evasion and an interesting potential signal related to a promised renters' rebate as well.

Sadly, this information-sharing initiative is the only whisper in the budget with respect to the underground economy and tax evasion. B.C. governments, first the Liberals and now the NDP, have shown no leadership on the underground economy, falling further behind the provincial leaders of Quebec and Ontario. My motto is always: It is the lazy finance minister who raises taxes first rather than ensuring the taxes they intended to collect actually are collected.

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