A tax expenditure is defined as the reduction in tax revenues
that results when the costs of a government program, or the benefits
provided under that program, are deducted from tax revenues rather
than reported as a budgetary expenditure. This type of expenditure
is usually made by offering special tax rates, exemptions, or
tax credits to program beneficiaries. Governments introduce tax
expenditures primarily to achieve social policy objectives such
as transfers to lower income taxpayers or to promote economic
development and growth.
The major reason for reporting tax expenditures is to improve
government accountability by providing a more complete picture
of government spending. It is for this reason that British Columbia's
major tax expenditures are presented in the following tables.
Reporting tax expenditures is also consistent with recommendations
contained in the 1994/95 report of the Auditor General.
Tax expenditure reporting is relatively common. The Canadian
federal government, the American federal government, some American
states, several European national governments, and on occasion
some Canadian provinces issue reports on tax expenditures. This
is the second year in a row that the British Columbia government
has reported tax expenditures.
The main reason governments use the tax system to deliver programs
is to reduce their own administration costs and to reduce compliance
costs for recipients. In certain situations, the tax system allows
intended beneficiaries to be readily identified from information
that is already collected. in these cases setting up a separate
expenditure program would result in costly duplication of effort.
An example is the provincial sales tax credit, which is delivered
through the income tax system. If this were a direct provincial
expenditure program, a provincial agency or office would have
to be established to duplicate much of the work already done by
Revenue Canada. In addition, it would require individuals to
undergo a separate, time-consuming application process in order
to qualify for the benefit.
There are, however, several drawbacks to tax expenditure programs.
First, their overall cost receives less public scrutiny than
is the case for spending programs because annual budget approvals
are not typically required. Second, some tax expenditure programs
confer the greatest benefits on those who pay the most taxes,
which means that the major beneficiaries are often high income
earners. Sales tax exemptions, for example, often provide a greater
absolute benefit to those with higher incomes because they have
more to spend on consumer products. This runs counter to the
objective of incorporating progressiveness into the tax system.
Finally, costs are often more difficult to control under a tax
expenditure program because the benefits tend to be more open
ended and enforcement is often more difficult than for spending
programs.
Two criteria were used to choose those features of the tax system
that should be reported as tax expenditures. First, the emphasis
is on tax preferences and transfers through the tax system that
are close equivalents to spending programs. Under this approach,
the focus is on items that would not be out of place on a list
of spending programs. By implication, the list does not include
tax measures designed specifically to ensure fairness in the tax
system, or to simplify the administration of the tax. The list
also does not include items that are generally excluded from a
particular tax base. An example is the non-taxation of most services
under the sales tax, a tax which is primarily designed to apply
to purchases of goods.
Second, smaller items of less than $2 million are not included.
As a result, in this report, tax expenditures include major government
programs delivered through the tax system, but do not include
all items commonly considered to be tax expenditures in other
reports. Many items, such as the basic personal income tax credit,
are excluded because they are designed primarily to improve fairness
in the tax system and are not comparable to spending under budgetary
programs.
As with any definition of tax expenditure, these criteria leave
some grey areas. Future tax expenditure reports will continue
to refine and clarify the criteria used to define provincial tax
expenditures.
The following list, which reports 1995/96 tax expenditure estimates,
does not include tax expenditures introduced with the 1996 budget.
It also does not include the BC Family Bonus, which will be implemented
in 1996/97.
The cost of individual tax expenditures should not be added together
to reach a total for provincial expenditures for two reasons.
First, in some cases the expenditure programs interact with one
another so that eliminating one program could increase or decrease
the cost of another program. Second, eliminating certain tax
expenditure programs could change the choices taxpayers make,
which in turn would affect the cost estimates.
For presentation purposes, British Columbia tax expenditures through
the income tax system have been separated into two categories.
The personal income tax expenditures that have been included on
the following list cover a range of policy objectives, including
support for charitable activities, health care and education.
Most corporation income tax expenditures, such as accelerated
write-offs of Canadian development and exploration expenses, are
intended to achieve economic development objectives.
TABLE El
1995/96 Estimated Cost | |||
($ millions) | |||
PROVINCIAL SALES TAX | |||
Commissions paid to retailers and hotel operators | 24 | ||
Exemptions for the following items: | |||
Food (basic groceries, snack foods, candies, soft drinks and restaurant meals) | 535 | ||
Residential fuels (electricity, natural gas, fuel oil, etc.) | 105 | ||
Prescription and non-prescription drugs, vitamins and certain other health care products and appliances | 56 | ||
Children's clothing and footwear | 25 | ||
Clothing patterns, fabrics and notions | 7 | ||
Specified school supplies | 10 | ||
Books, magazines and newspapers | 51 | ||
Basic telephone and cable service | 35 | ||
Bicycles | 4 | ||
Certain energy conservation equipment | 10 | ||
Certain safety equipment | 8 | ||
Labour to repair major household appliances, clothing and footwear | 6 | ||
Livestock for human consumption and agricultural feed, seed and fertilizer | 25 | ||
Certain purchases by farmers, fishers and aquaculturalists | 19 | ||
FUEL TAX | |||
Tax exemption for alternative fuels | 29 | ||
Tax exemption for international flights carrying cargo | 7 | ||
Lower rate for family farm trucks (on road) | 3 | ||
PERSONAL INCOME TAX | |||
Provincial Measures(1) | |||
Sales tax credit | 55 | ||
Venture capital tax credit | 11 | ||
Employee venture capital tax credit | 6 | ||
Political contributions tax credit | 3 | ||
Federal Measures (1) | |||
Deduction and inclusion of alimony and child support payments | 17 | ||
Charitable donations tax credit | 76 | ||
Tax credits for tuition and education | 31 | ||
Tax credits for disabilities and medical expenses | 421 | ||
Pension income tax credit | 25 | ||
Credit for persons older than 65 years | 94 | ||
Exemption from capital gains up to $500,000 for small businesses and family farms | 90 | ||
Tax deduction for residents of northern and isolated areas | 15 | ||
Non-taxation of employer-paid insurance premiums for group private health and welfare plans | 97 | ||
Registered Retirement Savings Plans(2): | |||
exemption for | |||
- contributions | 317 | ||
- investment earnings | 237 | ||
taxation of - withdrawals | (81) | ||
Total | 473 | ||
Registered Pension Plans (2): | |||
exemption for | |||
- contributions | 429 | ||
- investment earnings | 662 | ||
taxation of - withdrawals | (394) | ||
Total | 697 | ||
CORPORATION INCOME TAX | |||
Provincial Measures (1) | |||
International financial business tax refund(3) | 5 | ||
Federal Measures(1) | |||
Charitable donations deduction | 6 | ||
Accelerated write-offs for Canadian development and exploration expenses (4) | 55 | ||
Accelerated write-off for capital equipment used in research and development (4) | 2 | ||
Allowable business investment loss | 8 | ||
Non-taxation of life insurance companies' world income | 6 | ||
CORPORATION CAPITAL TAX | |||
Exemption for family farm corporations | 2 | ||
Exemption for cooperative corporations | 2 | ||
Two-year tax holiday for eligible British Columbia investment expenditures | 18 | ||
SCHOOL AND RURAL AREA PROPERTY TAXATION(5) | |||
Home owner grant | 437 | ||
School tax assessment reduction on current values for farm buildings and farm land, and residences in the agricultural land reserve | 15 | ||
Assessment of farm land at farm use values(6) | 83 | ||
Exemption for places of worship | 7 | ||
Assessment exemption of $10,000 for industrial and business properties | 2 | ||
Pollution equipment abatement | 8 | ||
Overnight tourist accommodation assessment relief | 3 | ||
Managed forest land classification | 7 | ||
Municipal discretionary exemptions | 14 | ||
PROPERTY TRANSFER TAX | |||
Exemption for first-time home buyers | 25 | ||
Exemptions for the following items: | |||
Property transfers between related individuals | 22 | ||
Property transfers to municipalities, regional districts, hospital districts, library boards, school boards, water districts and educational institutions | 5 | ||
Property transfers to charities registered under the Income Tax Act (Canada) | 2 | ||
OTHER TAXES | |||
Oil and gas royalty holiday | 4 | ||
Horse Racing Tax - transfer of revenues to the British Columbia Racing Commission | 10 |
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