Report E: TAX EXPENDITURES

Introduction

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 third year in a row that the British Columbia government has reported tax expenditures.

 
The Role of Tax Expenditure Programs

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 overlap and 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 can run 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.

 
Tax Expenditure Reporting

Three criteria were used to choose those features of the tax system that should be reported as tax expenditures. First, the emphasis is on reductions, exemptions and refunds of tax 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 to meet broad tax policy objectives such as improving fairness in the tax system, or measures designed 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 provincial sales taxes, which are primarily designed to apply to purchases of goods. Finally, tax remission orders are not included, because they are not equivalent to an expenditure program, but are granted on a case by case basis.

Second, revenues raised under provincial government authority that are turned over to agencies outside of government are not reported as tax expenditures in this report. This includes, for example, horse racing tax revenues transferred to the Racing Commission and fuel tax revenues transferred to the BC Transportation Financing Authority.

Third, smaller items of less than $2 million are not included. Where practical, smaller items have been presented together as an aggregate figure. This has been done, for example, with the sales tax exemptions for farmers, fishers and aquaculturists. Rather than listing the exemptions separately, an aggregate amount of these exemptions is given.

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.

 
British Columbia Tax Expenditure Programs

The following tables, which report 1996/97 tax expenditure estimates, include two tax expenditures introduced in 1996. They are the BC Family Bonus, which was announced in November 1995 and implemented in July 1996, and the two-year corporate income tax holiday for small businesses, which was introduced in the 1996 budget. No new major tax expenditures are included in the 1997 budget. This budget includes only a few small measures in the form of sales tax exemptions directed towards the agricultural sector or provided for the purchase of safety equipment. Their cost is estimated to be less than $100,000 per year and they are consistent with sales tax exemptions already given to the agricultural sector and for safety equipment purchases.

The BC Family Bonus is a new provincial program which provides eligible British Columbia families with a monthly payment to assist them with the cost of raising their children. About 30 per cent of program costs are treated as tax expenditures, while the remaining 70 per cent are reported as budgetary program costs. The 30 per cent, tax-expenditure portion are family bonuses paid in the form of personal income tax reductions. Provincial income taxes, as reported in the budget, are reduced accordingly. The other 70 per cent takes the form of payments sent to low income families who pay little or no personal income tax. These latter payments are reported as a voted expenditure in the provincial Estimates and are not subtracted from provincial income tax revenues. This tax expenditure report includes an estimate for 1996/97 of the 30 per cent portion.

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 have been broken into three broad categories.

• Social and Income Transfer Programs: These include mainly tax expenditures that are offered as part of the government's mix of health, education, housing and income transfer programs. Examples are the BC Family Bonus, the home owner grant, the sales tax exemption for school supplies and the income tax credit for medical expenses.

• Economic Development and Business Assistance Programs: This category includes mainly tax preferences for farmers and small businesses and measures to encourage new investments.

• Environmental Protection Programs: There are relatively few tax expenditures in this category because environmental protection is now generally based on the principle of "polluter pay." However, environmental tax expenditures include, for example, a sales tax exemption for bicycles and a fuel tax exemption for certain alternative fuels.

Each category has its own table of tax expenditure estimates.

Within each table, the list of tax expenditures delivered through the income tax system has been separated into two subcategories.

• Provincial Measures: This includes all major tax expenditures that are under provincial policy control.

• Federal Measures: British Columbia shares the cost of some federal income tax expenditure programs because, under the tax collection agreement between British Columbia and the federal government, the province has agreed to give up policy control of the income tax base in the interest of reducing administration and compliance costs and maintaining a consistent income tax system across the country.

  This means the province has no direct control over income tax preferences delivered through changes to the income tax base or in the calculation of basic federal tax. As a result, federal enhancements to the treatment of charitable donations, medical expenses and tuition costs, announced in the 1997 federal budget, will automatically reduce provincial income tax revenues in future years.

The personal income tax expenditures that have been included on the following tables cover a range of policy objectives, including support for charitable activities, health care and education. Meanwhile, most corporation income tax expenditures, such as accelerated write-offs of research and development capital costs, are intended to achieve economic development objectives.

TABLE E1 -- SOCIAL AND INCOME TRANSFER PROGRAMS

TABLE E2 -- ECONOMIC DEVELOPMENT AND BUSINESS ASSISTANCE
          PROGRAMS

TABLE E3 -- ENVIRONMENTAL PROTECTION PROGRAMS

Budget 97 Reports

---

BC Budget 97

---

BC Ministry of Finance and Corporate Relations

If you have questions or comments about content please contact: Communications