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The Progressive Economics Forum

Burned by B.C.’s Toxic HST Debate

“The fact that the Clark government’s Frankenstein HST hybrid will significantly reduce provincial sales tax revenue at a time when public services are already under intense fiscal pressure is a powerful and principled reason to throw the whole package out in the referendum, and start the debate from scratch.”

I may live in Ontario, but I know enough about B.C. politics to know that you have to be very careful what you step into.  That’s why I tried to steer clear of any public comment about the debate over the B.C. HST that’s been raging out there.

So I was very surprised when my ears started ringing, from the other side of the Rockies, a couple of weeks ago.  My phone started ringing, too, with people calling to ask why on earth I had endorsed the HST.

I’ve never endorsed the HST.  That claim, made by business-funded HST advocates in B.C. trying to drive a wedge between unions in B.C. and in Ontario, is blatantly false.

It all started when David Robertson, who is a spokesperson for the Smart Tax Alliance, started reading aloud on the radio from some personal e-mails that he and I had exchanged back in 2006 – long before the idea of the HST was ever sprung on an unsuspecting public by Gordon Campbell.

[Don’t confuse this David Robertson with my recently retired colleague at CAW David Robertson.  That David Robertson is a fine person and Canada’s greatest union expert on work organization issues.]

My e-mail exchange with Robertson started after he and I met at a policy conference.  He wrote me afterwards to ask if the CAW would join a coalition of groups lobbying for a harmonized tax in Ontario.  I turned down his request.

A couple of weeks ago, Mr. Robertson quoted selectively from those e-mails on CKNW radio to make it sound like I was endorsing the HST.

I called him on June 23, not even remembering that we had met before, and asked him where on earth he got these quotes.  When I learned he was quoting from 5-year-old personal e-mails, written in an entirely different context, I was furious.  I told him I thought it was highly unethical to read from 5-year-old personal e-mails on a radio show.  I also informed him that neither I nor the CAW had ever endorsed the account HST in either Ontario or BC, and asked him to stop saying those things.  I wrote to CKNW (and their pro-HST commentator Michael Campbell, in particular, who was repeating Robertson’s false claims) to inform them of the falsehood.

Now this week, Robertson’s group, the Smart Tax Alliance, found a scanned copy of an internal memo I wrote in 2009 to our local union leaders in Ontario.  I don’t know where they got it – they won’t tell me.  It was an internal CAW memo, we didn’t publish it.  The Smart Tax Alliance’s PR director told me on the phone it was delivered to them by someone who found it on the web, but would not divulge who sent it to them.  (You get three guesses, and the first two don’t count.)  And Mr. Robertson’s claim that it has now mysteriously disappeared from the CAW website is false; it was never there.  The Smart Tax Alliance posted it on their site, and it’s now the most famous (infamous?) internal memo I ever wrote!  Never mind the silly cloak-and-dagger: I definitely wrote the memo, it was intended internally for our Ontario leaders, but now it’s out there.  Whatever.

In the memo, I explain to our leaders in Ontario how the HST works, some of the benefits of the value-added tax model, but also some of the costs of the Ontario proposal: like the fact that the tax is now applied to new sectors of the economy that were exempt from the former PST, and the fact that sales taxes in general are regressive.  The memo concludes that the most progressive tax policy would be to abolish sales taxes altogether, and replace the lost revenue with higher personal and corporate incomes taxes (a policy option which, obviously, would face its own policy challenges).

Most importantly, the memo is explicit that the CAW did not endorse the HST in Ontario, nor did we condemn it.  It was also explicit that its analysis did not apply to B.C., given the big differences between the provinces.  The main point of my memo was to discourage our activists here from jumping on board any anti-HST bandwagon in this province.

Quoting selectively again from my memo, the Smart Tax Alliance, Mr. Robertson, and other HST proponents in B.C. (including Tony Wilson in an on-line commentary) falsely claimed that I and the CAW support the HST.  This is a blatantly false claim.  The Smart Tax Alliance and Tony Wilson both corrected their errors and withdrew that claim from their respective on-line commentaries.  I’m not sure about Mr. Robertson; he was still claiming that the CAW supported the HST later this week, even though he was personally informed weeks ago that neither I nor CAW have endorsed the HST anywhere.

In 20 years of life as a public economist, where as most of you know I’ve engaged in all kinds of often heated debates, I have never experienced such unprofessional and unethical behaviour from a debating opponent.

My recommendation to our Ontario leaders to stay out of the HST fray here was motivated as much by political reasons, as economic ones.  In Ontario, the anti-HST movement was very much tied up with an anti-government, anti-tax message.  Our view was that movement would ultimately do more harm than good.  For the most part, the labour movement in Ontario stayed away from the HST, and the protests here were pretty small and short-lived anyway.

At any rate, when I write an internal memo listing costs and benefits of a certain policy, you can hardly conclude that I or my organization have endorsed that policy.  That’s nonsense.  And at any rate, I don’t determine CAW policy anyway. I give advice.  It’s our elected leaders who set policy.  If I write an internal memo saying I think the CAW should use pink toilet paper, and it somehow gets posted on the web, that doesn’t imply that the CAW has a policy in favour of pink toilet paper.

In B.C., where the HST proposal itself is different, where the economy is different, and where the politics are (very) different, the labour movement (including the CAW locals in B.C.) have been actively engaged in the fight to reject the Liberal government’s revised HST proposal in the current referendum (this means, perversely, voting “YES”).

The B.C. labour movement’s opposition to the HST has been carefully framed in the context of a broader demand to restructure the provincial tax system on a more progressive basis.  The debate is thus much bigger than “HST or PST.”  It’s about the whole question of how to fund first-class public services, with a system of fair and efficient taxes.

I don’t see a contradiction between that approach, and what our union decided in Ontario, because of the many differences between the policy, the economy, and the politics of the two provinces.  In fact, the two positions are motivated by the same ultimate goal: solidifying the fiscal base of first-class public services.

One big difference between Ontario and B.C. is the relative importance in the two provinces of manufacturing vs. resources.  It is in manufacturing that the problem of “cascading” – a tax on a tax – is most severe because of the more intensive and complex supply chain that inputs to the sector.  This is not such an issue in resources (where value-added in the sector is a much higher share of total revenues).

Moreover, there’s an important issue about how companies will respond to the money they save with an HST, especially in exports.  In manufacturing, producers compete on price – so savings on input tax credits could make a difference to prices and hence to the volume of exports (and resulting employment).  In resources, however, prices are generally set by world commodities markets.  In that case, cost savings the company enjoys will not affect prices or volumes; they will likely show up as bigger profits.

Another important sectoral difference is the hospitality sector.  In Ontario, the hospitality & restaurant sector already paid PST, so the HST wasn’t a big shock. In B.C., it will face provincial sales taxes for the first time.  (Full disclosure: the CAW represents many hospitality workers in B.C., so that’s an important issue for us.)  In contrast, the main new sector that was hit by the HST in Ontario was home heating; the government brought in a temporary rebate that slightly more than offsets those higher costs (for a while, anyway).

In terms of overall fiscal impact, the biggest concern in my mind about the Clark government’s revised HST proposal is that it will significantly reduce the total revenues collected form the provincial sales tax.  Why?  In a desperate attempt to salvage the policy, the government’s proposal would cut the rate by 2 points (cutting the provincial portion from 7% to 5%).  If our main concern (as I suggested) is fighting to preserve the fiscal basis for public programs during an era of austerity, then the B.C. HST will do the exact opposite.

I suspect that the controversy in B.C. largely stems from the process by which the policy was introduced and handled.  The Campbell government sprang the HST on the public, after promising not to.  The resulting outrage was enormous and understandable.  Now the Clark government has fiddled with their plan, trying to bribe the voters with their own money by cutting the rate, and throwing in some other face-saving trinkets.  The B.C. vote is thus not a referendum on HST vs. PST; it’s referendum on the direction of overall tax policy, and the economic and political credibility of the government itself.

After all, the sales tax is just one piece of a bigger, ultimate question of the structure of our overall tax system.  You can’t think about the HST, without looking at what’s happening to the rest of the tax system.  What we’re ultimately concerned with is how we collect the taxes we need to pay for great public services, in a manner that is both fair and economically efficient.

The B.C. office of the CCPA has made that point very effectively, with a powerful new study that documents the overwhelmingly regressive impact of cumulative tax changes there in recent years.  The lowest income quintile in the province now pays 14-15% of their income in total provincial taxes, while the highest income quintile pays just 11%.  The HST is a small piece of that problem; cuts to progressive personal and corporate income taxes have been the main culprits.  But widespread populist anger about the injustice of the tax burden has surely played into populist anti-HST sentiment.  And for that reason the HST debate can’t be separated from the bigger issue.  To that end, the B.C. Federation of Labour’s effort to clearly link its fight against the HST to its broader fight for fair taxes is important and bang-on.

I think my full analysis of the HST debate in Ontario is reasonable and nuanced, and I stand by everything I said in it (repeating the strong and explicit proviso that it applies only to Ontario, and not to B.C.).  We could have a healthy and honest dialogue on the left about the HST and all the issues associated with it.  I am not the only person on the left to be cautious about the politics of campaigning against the HST; Hugh Mackenzie and Matt Fodor have raised similar points.  On the other hand, many good people on the left, like our own Erin Weir, have been strong and clear in opposing the HST.  (Erin buddy, you’d be a very popular guy out in B.C. right now if the ITUC could find their way to deliver you there in the near future!)

But with propogandists like Mr. Robertson on the prowl, there’s no room for healthy and honest dialogue.  Don’t ever write a policy brief that lists the pros and cons of any issue; folks like Robertson will come along, cite only the points he likes, and then sign you up as an endorser of his position.  It’s a shameful way of working, that does immense disservice to the honest dialogue that is essential to good policy-making.  No wonder everything seems black and white in B.C.; there’s no room for grey.

At any rate, the leadership of the B.C. unions have carefully weighed all these issues, and put their emphasis on fighting the government’s tax package as part of a broader campaign for well-funded, fairly-funded public services, and I support them entirely.  The vote in B.C. is not a referendum on the abstract principle of a value-added versus a cascading sales tax.  It’s been all muddied up with other issues: broadening the base, cutting the rate, cutting corporate income taxes, and everything else that’s been thrown into the haphazard Clark tax stew.  In short, it’s a referendum on the shattered credibility and regressivity of the government’s whole approach to taxes.  And sadly, the unethical, take-no-prisoners approach of the Smart Tax Alliance and its spokespersons is quite consistent with the duplicity of the provincial government’s whole approach.

(Side point:  There are no rules governing campaign funding in the HST debate in B.C.  HST advocates can collect as much money as they can from business backers, without declaring where it came from, and what it was spent on.  That is the stinky future of democracy in our plutocracy.)

For me, here’s the last nail in the coffin.  The fact that the Clark government’s Frankenstein HST hybrid will significantly reduce provincial sales tax revenue at a time when public services are already under intense fiscal pressure, is a powerful and principled reason to throw the whole package out in the referendum, and start the whole tax debate from scratch.

Enjoy and share:

Comments

Comment from Paul Tulloch
Time: July 8, 2011, 12:14 pm

So what colour is the toilet paper at the CAW? Lol.

First off, i want to say, david robertson is definitely a wonderful person who lead the charge on progressive work organization, thoughts, researh, and practical, he is a guru and i worked with him one a few years back on a Nortel study, back when nortel actually built things and i learned a lot. I hope he writes some good stuff in his retirement!

Now onto the other david robertson, he is a nasty piece of work, filled with obvious goals that no matter what you say jim, you now have 3-4 people dedicated to you from the right to watch you. No email is safe, no memo is sacred and every bag of garbage or recycle from your office is a target. Started eating lots of bananas they rot up real nice.

The bottow line is- hst is regressive, but in this age of austerity and confusion, i do agree that a fight against the hst could be easily channeled and fuel an anti- tax fight in
general, which to me is potentially not the best use of scarce union resources.

Truly, i am not sure and the success of the bc anti hst fight. Open the hood on that movement and a majority of the movement is pure and simple anti government/ anti tax general. And with respect to the progressives in bc, i do say they have tried with some effect to turn the anti hst into the proper anti regressive tax debate it should be. However it is a huge framining risk and a battle that would be difficult to win without a whole lot of resources and effort.

So i do agree it was a diffiult space to just automatically take a progressive position on and go public.

There are mnay issues, i know from working with unions, that given resources, and the size of the battle, sometimes the best strategy, despite wishfuk thinking, is to stay on the sidelines. Despite the rhetoric, unions have very few resources and do have to pick their battles.

Cheer up jimbo, there will be more battles and more rotting bananas on some old email you wrote that makes its way into the wrong hands and is recontructed for nasty ends.

Comment from duncan cameron
Time: July 8, 2011, 2:52 pm

On the issue of higher income taxes, versus the sales tax, I like this quote from John Lanchester writing in the LRB in 2003, and qualifying his defence of Blair:
“Yes, too much of this money is raised through indirect taxation; and the Government is storing up trouble for itself by refusing to make the case for higher income tax, instead doing things by stealth and relying on the electorate to be thick about noticing this; but still, the general trend is positive.”
In other words the left has to make the case for burden sharing. From each according …. you know the rest. Trying to trick people into paying taxes as regressive taxes, because we refuse to make the debate over taxation turn around fair, and just taxation makes little sense to me.
The economics of neutral consumption taxation rests on the assumption that markets know best how to allocate resources. How about green taxes on consumption of pollution instead, and zero taxes on educational products for example? Politically calling on people to pay their fair share does makes sense to me. Rae won in Ontario on the back of a fair tax campaign run by the OFL against the GST.

Comment from Erin Weir
Time: July 9, 2011, 5:40 am

Jim, thanks for the good word and congratulations on finding your way to the correct position on the HST in BC.

I strongly agree with your concluding sentence and note that it also applies to Ontario. The McGuinty government’s Frankenstein HST hybrid is reducing provincial tax revenue at a time when public services are already under intense fiscal pressure.

This post and your memo assert that the HST will benefit manufacturing by removing “cascading” sales tax from inputs. However, the Ontario government’s own numbers indicate that manufacturing will receive only 11% of the HST’s input tax credits.

The HST is shortchanging manufacturing, which accounts for 15% of Ontario’s GDP. The story that harmonization benefits manufacturing ignores previous PST exemptions and is never supported with real-world data. It is not a credible argument for the HST in either Ontario or BC.

Comment from Matt Fodor
Time: July 10, 2011, 11:47 am

An excellent piece Jim that appeals to “both sides” of the HST debate on the Left.

You are right to point out that the BC Liberals to make a compromise (i.e. lowering the PST portion) exacerbates the problem twofold: in that it reduces revenue for public programs further, and plays right into anti-tax sentiment.

Comment from Donald Hughes
Time: July 10, 2011, 6:14 pm

I know it was federal NDP policy for a number of years to phase out the GST in favour of higher income taxes. Has their been any work done on what a new progressive tax system might look like? The shift in rates would need to be quite large. For example, the provincial portion of the HST raises about $20 billion in Ontario. Straight income taxes (corporate + personal) raise about $35 billion. In other words, you’d need a 50%+ raise in provincial rates to shift from consumption to income. If that were across-the-board then the top PIT rate would be about 55% or more.

I don’t really think it is too problematic to use sales taxes as a sort of core to fund many programs, as long as the rebates are ample enough. What I think is more problematic is that progressive taxation, and progressive economics more broadly, seems to freeze in the idea of income inequality. That is, it takes “the rich” as a sort of given and the pleads to tax them, rather than shifting the economic structures of society in such a way that income is a return on labour or citizenship (broadly construed). As in, right now we dedicate enormous social resources towards the rich, when we should assign those resources better: Not by accepting their claim on those resources and taxing them but by denying them the position as rich as such.

Comment from Purple Library Guy
Time: July 10, 2011, 11:23 pm

Short of the revolution coming, I’m not clear how you do that. I suppose you could make laws capping salaries, but that still doesn’t touch the core of serious wealth–investment income. If you have a capitalist economic system, the core of its being is about owners being able to make money from owning. You can arrange the tax system to stop them from deriving too much money from that, but short of switching to some sort of socialism you can’t stop them from doing it in the first place. Not that I’m against such a transition, but I don’t see it happening in the next few years–not unless the economy completely collapses and we the mob are left with no option but to storm the barricades yelling “A bas les plutocrates!”

In the mean time, about the best we can do is make taxes more progressive, try to suck some of our blood back out of the vampires and sap their strength a bit.

Comment from Donald Hughes
Time: July 11, 2011, 11:30 am

Yes, I’m not saying it is an easy problem to fix. I just don’t see much research on real alternatives in Canada. As in, there are Policy Alternative reports that talk about modest reforms, and some grumbling about “neoliberalism”, but I’ve never seen much in the way of “here’s how we could move beyond capitalism.” Well, outside Quebec, where there is a tiny bit of that associated with Quebec Solidaire, but not in any rigorous way. Seems like an area where progressive economists could be of use. I suppose there is parecon out there as an idea but nothing really at a policy level. I’d like to learn more about this sort of thing, though.

Comment from Purple Library Guy
Time: July 11, 2011, 2:06 pm

You have a point. Really, in the whole world it might be argued that the only people working on that much are the Bolivarians in Venezuela and I dunno, maybe some policy wonks in Belarus?

Comment from Major Amberson
Time: July 12, 2011, 8:43 am

Jim:

Your “internal” memo has been available for public consumption for quite some time–at least in Liberal party circles. Glen Murray quoted from it in Hansard on May 5, 2010, in a question to the then Minister of Revenue, John Wilkinson.

Comment from Jim Stanford
Time: July 12, 2011, 8:58 am

Thanks Major, I didn’t know that.

Comment from Jeff Dean
Time: July 12, 2011, 11:08 am

@Donald:

If you’re looking for a new paradigm for progressive tax reform, check out the Labour Land Campaign, a group within the UK Labour Party.

http://www.labourland.org/manifesto/

The UK Lib-Dems have a similar group, called ALTER. The whole idea is to create a tax system that aims not to taxing the rich per-se, but to taxing the unearned or windfall incomes that make people rich and keep others poor. By doing so you could achieve an equitable distribution of income in the first place and reduce the necessity for redistribution.

Comment from Erin Weir
Time: July 12, 2011, 11:17 am

I certainly remember the Ontario Liberals publicly citing Jim on the HST. A memo circulated to every CAW staff representative and local in the province is not really internal.

It is unsurprising that the pro-HST business lobby is using this document in both Ontario and BC. The important thing is that Jim has come down on the correct side of the BC referendum.

Comment from Jeff Dean
Time: July 12, 2011, 11:17 am

@Jim:

I appreciated your argument about the suitability of value-added tax for manufacturing vs. resource industries; I’d never heard that one before. Here are a couple of other economic arguments against the HST in BC that you may not have heard of:

Increasing tax bias against employment – The HST increases the tax bias against employment and towards capital investment. Taxes on workers are already very high (mine are over 30% just with payroll and income taxes; adding the HST brings it around 40%) and on business investment, very low. For example, If a business were deciding whether to hire a cashier or buy one of those automated check-out machines, there are payroll taxes (CCP, EI, WCB, MSP), income taxes and sales tax to pay that drive a wedge between what the employer pays and what the employee gets at the end of the day to actually spend. On the machine, they now pay no sales tax and the corporate tax rate is very low and is also only charged on their net income (after deducting costs) rather than their gross income, as is the case with income tax on people (ie. I don’t get to deduct my cost of living before paying income taxes). That machine that costs $1000 would only have to earn a return a bit above that, but for a worker to get $1000 after tax, they’d need to pay him/her $1400 or so. All these serve to create a bias against hiring workers and towards investing in capital and are a major contributor to unemployment. This bias is only made worse by the HST.

PST protects BC jobs – The PST protected employment in BC by not taxing services. The HST taxes services and will therefore cause consumers to spend relatively less on services. A dollar spent on services creates more jobs in British Columbia than a dollar spent on goods, because the inputs of services are mostly supplied in BC (labour being the largest input), whereas most goods are imported.

Comment from Jim Stanford
Time: July 12, 2011, 11:29 am

For the record, when asked for our position on the HST in Ontario we always said we were not endorsing it, and I am not aware of anyone who claimed that we were — as the Smart Tax folks deliberately and repeatedly did in BC. And yes Erin, I will indeed think twice in the future about memos! (Memo to self…. stop writing memos.)

Comment from Erin Weir
Time: July 14, 2011, 1:17 am

The Liberals repeatedly identified you and CAW as endorsing the HST in Ontario.

Glen Murray told the Ontario Legislature that “the CAW comes out and says the HST will actually create hundreds of thousands of jobs and will continue to help sustain our auto sector” (February 18, 2010). The Finance Minister cited you as personally supporting the HST (December 9, 2009).

The Liberals also cited you as endorsing Jack Mintz’s ridiculous claim that the HST and provincial corporate tax cuts will create 591,000 jobs. The Finance Minister said, “Jim Stanford, the CAW economist, has signed off on this, saying that its methodology is right and its conclusions accurate” (November 30, 2009). He and the Premier made similar comments in the Legislature on November 25, 23, 19 and 16.

Comment from Donald Hughes
Time: July 14, 2011, 4:00 pm

@Jeff, thanks. I’ve always been a bit suspicious of Georgism (single/land value taxes) because they seem a bit too simplistic. Same with any tax reform that centers on a single tax, really. Maybe there’s something positive about having a mix of all sorts of different taxes out there.

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