Tax and spending cuts a raw deal for BC's hinterland

For several years now, many observers of the BC economy have noted a split between the highly diversified and populous Lower Mainland (plus Victoria) and the rest of the province, which continues to be resource-dependent and highly vulnerable to swings in international market conditions. The gap between the "two economies" has been growing. But instead of an economic strategy to shrink that gap, BC's tax and spending cuts are making it worse.

BC's "Hinterland" is hurting. A "perfect storm" has been brewing for several years and now hangs over resource-based communities around the province. The softwood lumber dispute is just one part of a picture that includes rock-bottom commodity prices, a global economic slowdown, stagnation in Asian export markets, and a twenty-year decline in capital investment.

Countering these forces is a provincial economic strategy that hinges on tax cuts. Unfortunately, not much of the tax cut actually made it to places where help is most needed. The CCPA's recent study, Bleeding the Hinterland, calculates the total and average personal income tax cut for every BC region and municipality. Most of the tax cut stayed in the southwest corner of BC--in the Lower Mainland and Victoria--with only 29% of the tax cut pie spread across the rest of the province.

The big winner in terms of geography was Greater Vancouver, already the wealthiest part of the province. With 51% of the province's taxpayers, the Greater Vancouver Regional District got 58% of the total tax cut. Most places outside the GVRD got a share of the tax cut that was less than their share of the population.

The differences by municipality are more stark. West Vancouver got the largest average tax cut in BC, at $2,085 per taxpayer, some three times the provincial average of $714. The smallest tax cuts were in the Okanagan, with Keremeos at the bottom with a mere $335 per taxpayer.

Calculating the regional distribution of corporate tax cuts is more difficult, but it is likely that these too are tilted in favour of the Lower Mainland, the location of most corporate head offices. Moreover, corporate tax cuts may end up in the pockets of shareholders outside BC, or they may be directed towards higher executive pay. Assuming that corporate tax cuts will translate into new investment in rural BC is, at best, a leap of faith.

To the extent that tax cuts inject money into communities, tax increases and spending cuts take money out. Tax increases--higher sales taxes, MSP premiums, and tobacco taxes--amount to about a third of the value of the tax cuts. Moreover, the taxes on the rise are regressive ones--people with low and modest incomes take a bigger proportionate hit as a share of their incomes.

While smaller communities got less than their share of the tax cuts, they are bearing more of the brunt of spending cuts. These cuts hit communities outside the Lower Mainland hardest, with closures of government offices, courthouses, schools and health care facilities. For most smaller communities, the public sector is the number one or two employer. The loss of income from public sector jobs adds to losses in the resource sector.

And spending cuts have barely begun--office closures and service reductions will intensify over the next two years. Communities are facing large social and environmental costs due to cuts in public services, as the government seeks to pay for the tax cuts. This loss of public sector jobs and services in places where fewer alternative possibilities exist threatens to accelerate the depopulation of the Hinterland.

Together, the tax and spending cuts are not a recipe for the revival for rural BC. To the contrary, they are making a bad situation worse. And at present, the biggest economic development initiative in the government's arsenal is the Olympics, which if successful, will further confine public spending and any economic spin-offs to the Vancouver-Whistler area. BC's Hinterland will be forced to watch from the sidelines.

Economic development outside the Lower Mainland needs to be high on the government's agenda. Otherwise, the gap between the Lower Mainland and the Hinterland will only continue to grow.

Marc Lee is an economist with the BC office of the Canadian Centre for Policy Alternatives.