Business Investment in Machinery and Equipment

Archived Topic Box from the 2002 Second Annual Benchmark Report

Significant and ongoing business investment in machinery and equipment is essential to ensure that a region is constantly adapting and restructuring itself – necessities for any economy that hopes to remain competitive. Machinery and equipment investments include a wide array of items that are used throughout the production process to create final goods and services. Such investments are the primary mode by which new efficiency enhancing technologies are introduced to the marketplace, thus driving productivity gains. Productivity fosters economic growth, spurs increases in wages and employment levels, and thereby leads to overall increases in living standards.

Business investment, and thus productivity gains, can be encouraged in a variety of ways. By reducing net costs of capital investment in machinery and equipment, a competitive tax regime will stimulate new investments such as plant upgrades, modernization of communication systems, and other efficiency enhancing measures. Many investments, which have marginal or negative returns under higher effective tax rates, will become profitable when the tax burden is more competitive. Thus tax cuts may fuel investment in projects that were previously not deemed viable.

In addition to actual tax cuts, taxation rules are also important in encouraging or discouraging business investment. For example, depreciation rules that do not account for the rapid obsolescence of computers and much modern technology – with depreciation periods often extending even longer than a product's useful life – can significantly increase the net cost of investing in these items.

In many of the provinces and states that compete directly with BC for investment dollars, machinery and equipment used in the production process is not subject to sales taxes. In an environment and economy where businesses and capital enjoy greater mobility than ever before this situation has – in the past – put BC at a distinct disadvantage in both attracting new business and in encouraging existing businesses to make necessary investments to expand and upgrade facilities. Lack of capital investment has meant that some industries in BC have lagged behind competitors in terms of productivity growth and have been slow to adapt to the increasingly knowledge-based economy.

However, effective July 31st, 2001 the BC government exempted production machinery and equipment purchases made by manufacturers in eligible industries – including logging, mining and petroleum and natural gas extraction. This move, with an estimated net cost reduction to business of $87 million in 2001/02*, is a step in the right direction, but exempting more business inputs would provide further incentives for business to invest in machinery and equipment. Incenting business investment in machinery and equipment also lays the groundwork for productivity growth, which in turn should help fuel economic growth in the province as a whole.

Note: *British Columbia Ministry of Finance, Economic and Fiscal Update, July 30, 2001.