A Reality Check for BC: The Impact of Behavioural Responses on the 2013 Budget's Proposed Income Tax Increases

The 2013 British Columbia budget proposes a temporary 2.1 percentage point tax-rate increase on individual taxpayers earning more than $150,000, and a permanent 1 percentage point hike in the corporate income tax rate. Individual and corporate taxpayers will adjust their behaviour in response to the tax hikes, imposing economic costs and leading to tax revenues falling short of expectations. In the near term, personal tax revenues could disappoint by as much as 40 percent. In the long term, BC’s corporate income tax revenues may fall below the level they would have been without the tax increases. Less economically damaging tax reforms – such as the recently rejected Harmonized Sales Tax (HST), progressive property taxation, carbon tax increases, or lower tax expenditures – should be considered. As a matter of course, governments should disclose the extent to which their estimates for tax revenues after policy changes incorporate potential behavioural responses – if any.