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The Progressive Economics Forum

Droppin’ some HST

The province-wide revolt over BC’s looming Harmonized Sales Tax is reminiscent of protests a generation ago when the HST’s federal parent, the Goods and Services Tax, was born. The rationale for that shift was similar to that of the HST: to switch from an invisible tax paid by producers (the Manufacturers’ Sales Tax) that was passed on to consumers to a transparent tax (the GST) paid directly by consumers.

While this is not controversial for economists, public hatred for the GST has never really gone away, and the Harper Tories capitalized on those sentiments by reducing the GST twice. Given these ugly politics, why any sensible provincial politician would go down that road is beyond me, although it explains why we heard nothing about the HST until after the election.

Having said that, in principle there is nothing wrong with harmonization. It simplifies administration, treats all goods and services the same for tax purposes, and allows exporters to reduce their prices since they get credit back for HST they pay on their inputs, unlike the PST. A more efficient tax and a broader tax base are also a good things from the perspective of raising revenues to support high quality public services.

The big problem with the HST is around who gains and who loses in the $2 billion tax shift from business to consumers. Consumers will be paying new taxes on goods and services previously exempt. And while the government has proposed a credit for low-income households with incomes under $20,000, it phases out very quickly after that, leaving a big hit for modest- to middle-income households with hundreds of dollars in additional taxes paid.

There may be some offset to this if businesses that did pay PST pass along their savings in lower prices. The government argues this will be the case on the basis of one study that examined the introduction of the HST in the Maritimes a decade ago. Unfortunately, the study does not adjust for differences in economic conditions or differences in what is covered by different provincial PST, so it is not conclusive. What the study also finds (that has not been mentioned) is that the shift overall is somewhat regressive, largely due to the impact on higher shelter costs, clothing and footwear prices, and that elimination of PST did not so much lead to lower prices as much as slightly lower inflation rates for the goods and services affected. Oh, and the provincial governments also substantially cut the sales tax rate as part of implementation.

Lesson for BC: don’t sit around waiting for prices to fall, and expect that businesses will continue to try to make as much money as possible.

But for all the furor over the HST, fixing it is relatively easy to do. The key is the credit paid back to households. By increasing the threshold of the credit (to say $30,000), phasing it out more slowly (so that a large majority of households get something back) and expanding the value of the credit, the government can protect the most adversely affected households. These actions, combined with using the remaining proceeds to fund public services can turn a regressive tax into a progressive outcome.

This will cost some money but that is why the federal government is providing $1.6 billion in transitional funding. The September BC budget update has the government using not a penny for transition, only to reduce the provincial deficit in each of the next three years.

We should also go one step further: to the extent that businesses sock away away their savings on PST into higher profits this will lead to a windfall for high-income earners in BC (and since 2001 BC’s richest have already racked up huge reductions in their tax bills). So we need to compensate by adding a new top income bracket, kicking in at income above $150,000. Only a tiny fraction of BC taxpayers would ever be affected by this new bracket and it would also raise additional revenues. If the government wants to lower its deficit, they should get it from the people with the most money.

Enjoy and share:

Comments

Comment from Erin Weir
Time: September 24, 2009, 11:36 am

Yes, that one study seems to have been repackaged at least half a dozen different ways: as a chapter in the John Deutsch Institute’s book on the 2006 federal budget, a C. D. Howe Institute commentary, a Rotman School working paper, a Canadian Public Policy article, etc.

The finding that harmonization was regressive has indeed been under-reported. But let the record show that I highlighted this aspect of the study two years ago.

Comment from Stephen Gordon
Time: September 24, 2009, 12:55 pm

Any reason to think than an increase in profits would be permanent?

Comment from David Reay
Time: September 26, 2009, 12:52 am

I wonder about the regressive nature of the tax. When I look at the list of categories that are the HST add-on I see a lot of items that are used predominantly by high income people. Is there any research on the tax revenue relative to income. For example the property tax (only over $400K and reduced for the next $100K) looks to be almost necessarily going to target high income people.

Comment from Janet
Time: October 8, 2009, 12:11 pm

I am not looking forward to the HST on Canada day. I will never celebrate Canada day again. There are no jobs in BC, more lay offs every day. campbell’s famous $8.00 an hour minimum wage. Food banks can’t keep with the demand now. A mother and two children, living on $8.00 an hour, will be homeless. Seniors, have to choose heat or food, they can’t afford both. BC takes the prize for the worst child poverty in Canada. However, campbell made sure he wouldn’t have to choose, food or heat, because he gave himself a 53% wage increase. A rebate to be paid every four months is asinine. In four months? These people can’t make it week to week. I would like to insist campbell roll back his pay to $8.00 and hour. campbell has no idea of how poverty stricken citizens are forced to live because of him. campbell is so far from reality, he just has no clue. My next vote will be for the Western Block Party, I believe in fairness to all citizens. We in the west could depose a premier, who’s criminal acts has turned BC into a third world province

Comment from marryanne
Time: January 5, 2010, 12:37 pm

As a single female over 65, I won’t be able to survive Harper and Campbell, nor, Iggy and Hansen. Every one of them, have been caught lying. They are quite the motley crew. The burden of the HST, will be shifted to, blue collar wage earners, low income families, and seniors. The very people, that, have lost, jobs and homes and have fixed pensions. Seniors, have no write offs, get nailed for income tax as well, no matter if you are in poverty. The HST, will cause, more of us to be homeless. 12%, on anything, will put, low income citizens, on the streets.

Comment from Anna
Time: January 5, 2010, 3:41 pm

The HST, will be shifted onto the backs of, wage earners, low income families and seniors. We, are the very citizens, who, are unable to pay more taxes. I disbelieve, big business will pass any savings on to the consumer.

Gordon Campbell was asked, why the cost of food is so high. He said it was because, the price of gas went high, but, he said, lower gas prices, would moderate the cost of food, the cost of food went even higher. My community, is going underground, and, the bartering system, will be in effect. By, next fall, hopefully, our residents, will only have to buy from, the supermarket is, sugar, flour, coffee, tea, salt and pepper. I pay more for taxes, and insurances, than I do for food. But, the only way for a senior can cut down are, groceries and utilities. I know for sure, I won’t survive Harper and Campbell. Living in a mill town, I am afraid my house won’t sell, because, Campbell, shipped our mills to China, those jobs, will never come back. BC, is terminally ill, and with Campbell, selling out our resources, BC, has nothing left, to climb out of the recession. So, of course, the HST, and the asinine carbon tax, and God knows, what the next tax will be, invented by, Campbell and Hansen, to cover the debt of the Olympics. The corruption, in this country, is, disgraceful.

Comment from Michael
Time: July 3, 2010, 5:23 pm

I never believed Canada would become a terrorist state but it may be in effect as mof Canada day.
I can see angered people getting together and actually going after the people who were stupid enough to get this started. Iggy for want of another name can make all the threats he wants when he states this “Steven Harper were coming after you” that is the silliest words ever spoken by a looser . Harper does have to fear being takren out but not by the Liberals they are just as bad and unskilled and Harpers Party. I will hold my nose and Vote for the NDP. its the only choice we have God help us bjut the liberals and the so called conservatives have to go. the only other thing we as Canadians can do is stay home every day and dont spend dont drive dont work. just one week will pass and Harper will kill any HST plans and never tyry it again. but were talking about Polite Candians how doumbg are we????

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