Since 2001, British Columbians have benefited tremendously from the tax cuts implemented by the provincial government. They have dramatically improved the incentives both for individuals to work, save and engage in entrepreneurial activities, and for businesses to invest and develop in the province.

But recently, the government's focus has increasingly shifted away from pro-economic growth policies towards environmental initiatives that threaten B.C.'s improved economy. With the government undertaking pre-budget consultations, the message it needs to heed is clear and simple: B.C. needs another round of incentive-improving tax cuts aimed at improving competitiveness.

To understand the need for another round of significant tax relief, all we need to do is see how much the province has benefited from the last round.

After B.C.'s dismal economic performance throughout the 1990s, the newly elected Liberal government reduced the corporate income tax rate from 16.5 per cent to 13.5 per cent in 2001. It also eliminated the economically damaging corporate capital tax. Finally, the government enacted a 25-per-cent across-the-board reduction in personal income tax rates. These cuts reduced the tax penalty on success and hard work in B.C. and the results have been nothing short of remarkable.

A recent study by University of Alberta Prof. Bev Dahlby, one of Canada's leading economists, assessed the economic effects of the 2001 B.C. tax cuts and found they had, and will continue to have, a profound impact on economic growth. Specifically, Dahlby found that, over the long term, British Columbians will see their average incomes increase by more than 25 per cent as a result of the tax cuts delivered in 2001.

Today B.C., like the rest of Canada, faces economic uncertainty caused by the combination of the financial crisis in the United States, volatile commodity prices and troubled sectors such as forestry. In addition, the province is being saddled by significant economic costs imposed by new environmental taxes and regulations. To right the ship, the B.C. government should enact a pro-growth tax relief package.

Here is what is needed:

First, the B.C. government must reduce personal income tax rates faced by middle- and upper-income British Columbians. While the government continues to claim that, B.C. has the lowest income tax in Canada, the reality is somewhat different.

Three of the five personal income tax rates in B.C. (10.5 per cent, 12.3 per cent and 14.7 per cent) are higher than Alberta's single rate tax of 10 per cent. Our top rate (14.7 per cent) is still nearly 50 per cent higher than Alberta's 10 per cent.

The destructive effect of progressive income taxation is now broadly accepted by economists. Moving towards a single income tax rate in B.C. would encourage people to work harder and smarter, invest more of their incomes, and increase their willingness to undertake entrepreneurial activity. A good first step towards a single personal income tax rate would be to reduce the number of personal income tax brackets from five to two, with a top rate of eight per cent. This would truly give B.C. Canada's lowest personal income tax rates for all taxpayers. Secondly, B.C. must continue to reduce taxes on capital investment. When all types of business taxes are accounted for (corporate income tax rates, sale taxes on business inputs, depreciation allowances), the province still maintains the seventh-highest effective tax rate among the provinces.

To lower the effective tax rate on investment, the Campbell Liberals should reduce the corporate income tax from 11 per cent to eight per cent. This would give B.C. the lowest corporate income tax in the country and would encourage investment and development. In addition, B.C. should harmonize the provincial sales tax with the GST to exclude business inputs (capital) from taxation and reduce compliance costs on businesses by reducing the paperwork and related efforts to one system instead of two.

Finally, B.C. should increase the threshold for income eligible for the small business tax rate to $1 million from $400,000. Doing so would create an enormous advantage for small businesses by mitigating the impact of facing a much higher corporate income tax rate as they grow.

While some British Columbians will be wary of another round of large-scale tax relief, their concern is misguided. As Dahlby found, lower corporate and personal income tax rates lead to higher levels of investment and faster rates of economic growth. A faster-growing economy will in turn yield greater revenues for government. Moreover, the B.C. government has also underestimated revenues by roughly $13.1 billion since 2003-04. For both these reasons, the province can afford to implement immediate, meaningful and sizable tax relief. An aggressive tax-cutting budget will clearly signal to the investment community, home-grown businesses and individuals that the province is once again pursuing pro-economic growth policies. With the May 2009 election around the corner, the B.C. Liberals should reassert themselves as the tax-cutting, economy-improving party.