DARK SIDE OF B.C.'S ECONOMY GROWS LIKE WEED

When a home in a tony Vancouver neighbourhood makes an international
marijuana magazine because it houses a large growing operation, you know
that things aren't necessarily what they seem on the West Coast.

The provincial economy is no different. British Columbia is experiencing a
financial downturn, at the same time that it is home to the most vibrant
underground economy in Canada, according to the Business Council of B.C. The
economic dark side is estimated to account for 15 per cent of the province's
GDP or $20-billion a year. This figure exceeds the annual sales of its
forest industry.

What does this economic alter ego mean for the struggling province? The B.C.
government isn't realizing a lot of income that it would usually receive,
and some sectors, such as housing, are being inflated. In the end, this
financial yin and yang -- which tend to work in tandem with both going up
and down at the same time -- misrepresent British Columbia's fiscal picture
and cost its residents money.

Some of the largest effects of the underground economy, which includes both
legal and illegal activity, can be found in the drug economy and the booming
B.C. housing market.

According to the RCMP, British Columbia has become a huge producer and
exporter of marijuana, which by some estimates now ranks as the province's
largest cash crop. The provincial drug economy is such a boon -- pegged at
almost $7-billion or 40 per cent of the total marijuana trade in Canada --
that Forbes magazine made B.C. bud its cover story for its recent issue. The
article contends that high-tech marijuana growing operations are already big
business here and about to "get bigger." In legal industries, a percentage
of revenue would wind up in the tax stream as support for the provincial
economy. In an illegal industry, such as the drug trade, some of the money
still trickles down into the economy, but not enough to avert a bigger tax
burden being placed on those B.C. residents who are already paying their
share.

The hot B.C. housing market is another area that has been affected by the
underground economy. Recent Canada Mortgage and Housing Corp. figures
project that British Columbia will have the highest percentage of growth in
housing starts nationally in 2003-04. Here, the effects of the underground
economy are more subtle -- but important nonetheless.

Cheerleading from the local media and real estate industry pundits aside,
the already overpriced Vancouver real estate market is probably receiving a
boost from the underground economy. For instance, Jock Finlayson, executive
vice-president of the business council, questions where the money for new
sales is coming from, when key economic indicators such as output per
person, long considered a benchmark of economic success, indicate that the
province has been performing abysmally.

Local analysts have suggested that income from the total underground economy
is partly fuelling the housing boom. British Columbia's economy includes the
highest proportion of self-employed people in Canada, a large service
industry and the well-known marijuana trade. Self-employment offers
opportunities to conceal income that are unavailable to most people with
paid jobs, while service sector industry transactions are often difficult
for tax officials to police.

The underground economy has another impact on housing sales that relates to
labour and quality. McMaster University PhD candidate Lindsay Tedds, who is
one of five specialists in the underground economy in Canada, says a large
proportion of new-home builders in British Columbia have reported the
financial dark side to be a critical issue. Their worry arises from concern
that an overheated housing market will increase the demand for an
underground labour supply from the construction industry. Ms. Tedds says
that houses built by builders and construction workers using underground
labour may not be as structurally sound as those built by reputable
builders, and this could lead to a greater incidence of problems with new
homes.

In the end, British Columbia may have the most vibrant underground economy
in Canada, but it is also part of a nationwide alternative economy, which
analysts suggest is alive and growing. The reason for this boom is related
to the overall tax burden in this country. Academic studies on the
underground economy have found a significant link between high taxes and the
size of the underground economy, with reductions in the tax burden related
to lower illicit activity. "It is important for the government to understand
the relationship between all policies, such as taxes, the regulatory burden,
perceived fairness, and enforcement of tax evasion," Ms. Tedds says. And it
is incumbent on policy makers to address these issues to encourage people to
participate in the larger tax structure.

The B.C. government would be well advised to consider examining these
tensions and the erosion of its tax base provincially. Accessing some of the
undeclared income generated through the underground economy would be a
welcome boost to provincial coffers.

Mary Lynn Young is an assistant professor at the University of British
Columbia's School of Journalism.