Commentary
By Ben Eisen

Recently, in light of Trump’s tariffs, Premier David Eby has repeatedly promised to help strengthen the British Columbia economy. Unfortunately, he’s overlooking a key area of potential reform—taxes. The Eby government could reverse recent tax increases by the NDP government without adding significant pressure to government finances.

The province’s tax competitiveness has rapidly deteriorated. From 2017 to 2020, the Horgan government increased B.C.’s top personal income tax rate from 14.7 per cent to 20.5 per cent. Consequently, B.C. now has the fourth-highest top combined (federal/provincial) income tax rate in Canada and the United States at 53.5 per cent. (For perspective, the top rate in both neighbouring Alaska and Washington State is 16.5 percentage points lower than in B.C.)

These high tax rates make it harder to attract skilled workers and disincentivize individuals already in the province from working, saving and investing. In other words, uncompetitive tax rates hurt economic growth.

So what should the Eby government do? In short, learn from the past.

In 2001, the B.C. government enacted one of the most sweeping tax policy changes in Canadian history and cut all personal income tax rates by an average of 25 per cent. As a result, B.C. went from having the second-highest top personal income tax rate in Canada to the second-lowest. And the suite of tax reforms, which also included tax reductions on businesses, helped set the stage for years of growth and prosperity in the province.

At the time, the province was facing a budget deficit, and opponents of the tax cuts argued they would make the state of provincial finances even worse. However, there were only small long-term effects on government revenue. Why? Because, thanks to the stronger growth the tax cuts produced, by the fifth year of the reform government revenue was only $590 million lower than it would have been without the tax cuts. Given that total government revenue at the time was approximately $35 billion per year, the revenue change from the tax reform was clearly not substantial.

This experience has important implications for B.C.’s current tax competitiveness problem. For example, according to a recent study, if the Eby government reversed the Horgan-era hike of the top income tax rate from 20.5 percent back to 14.7 percent while also reducing the second-highest rate, it would transform the province’s competitive standing within Canada.

And like in the 2000s, the positive economic effects of this tax reform would blunt its negative revenue effects. Specifically, once the tax reductions were fully implemented, the annual “cost” of this substantial tax rate reduction would be equal to an estimated 0.5 per cent of provincial revenue. Despite the Eby government’s large projected deficits, the government would only need to reduce spending by this small equivalent amount to recoup the losses.

High personal income tax rates on top earners may make for good politics, but they generally do not make for sound economics or fiscal policy. Reversing recent tax increases—which affect doctors, engineers, entrepreneurs and other job-creators—would improve B.C.’s competitiveness and its economic growth prospects. And the fiscal cost of delivering this reform would be negligible. Clearly, the policy case for pro-growth tax cuts is overwhelmingly strong.

Ben Eisen is a Senior Fellow in Fiscal and Provincial Prosperity Studies and former Director of Provincial Prosperity Studies at the Fraser Institute.