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The Progressive Economics Forum

So the BC HST Was Defeated. Now What?

Earlier today, Elections BC announced the much anticipated HST referendum results. British Columbians have voted to scrap the HST.

The best part about having the results is that now we can move on from the narrow issue of what type of sales tax is better and focus our energies on some of the bigger issues affecting British Columbia.

Since the HST was first announced in the summer of 2009, it has dominated the policy debates in BC despite the fact that either way, the tax was going to have only marginal effects on the economy.

Yes, the HST is slightly more economically efficient than the PST. But the difference has been vastly exaggerated by HST proponents, who also refused to acknowledge that the tax is unfair to modest and middle-income families.

This is hardly surprising to readers of this blog who may recall me making this point before:

The HST is certainly an improvement on the PST from an economic efficiency point, but it’s a relatively small improvement. I am convinced that the economic benefits touted by the BC government and over exaggerated and the significant job growth, in particular, will not materialize.

The reason why HST only has a marginal impact is that taxes play only a marginal role in investment decisions. The main determinant of investment is expectations for future sales, driven in part by the general economic environment. Proximity to markets, the availability of appropriate infrastructure, access to cheap energy, access to a skilled labour force, and political stability are all much more important considerations when a firm is choosing where to set up shop.

The independent panel report, commissioned by the BC government, estimated that the actual economic impact we can expect from HST falls far short of the “giant leap” touted by U of Calgary’s Prof. Jack Mintz. For example, while Prof Mintz estimated 113,000 new jobs and 8% increase in capital investment by 2020, the independent panel found that we could realistically expect about 24,400 more jobs and 4% increase in business investment over the same period.

While I personally would have preferred to keep a reformed version of the HST, I think it’s counterproductive to fret over marginal efficiency differences after the people have spoken.

I’m also glad to see a return to somewhat improved tax fairness. We have witnessed a very large increase in income inequality in BC over the past 20 years, and we need to be very careful not to pursue policies that will make this problem worse — like the HST.

Recent research we’ve done at the CCPA shows that the HST is only one piece of an inequitable provincial tax system, a system in which the richest 20% of British Columbians pay a lower overall/total effective tax rate than the rest of us. Much more needs to be done to make sure everyone contributes a fair share to fund the the services and infrastructure BC needs in.

Now that the HST debate is over, it would be great to see some of the energy and focus many academics, business and community leaders dedicated to debating the HST be redirected to designing and debating solution to the real challenges facing BC.

Our unemployment rate remains high and slightly above the Canadian average at 7.3%. The economic outlook has worsened considerably over the last 6 months, with or without HST. There’s a serious risk of our main trade partner, the US, going into a second recession, which may push us back into a recession as well. Canadian corporations are not investing, even in the HST provinces. That’s because it’s not about taxes!

In the meantime, BC hasn’t had a budget and significant policy changes since Feb 2010. The Feb 2011 budget, tabled in the midst of a party leadership race, was prepared as a “placeholder” budget, padded with unusually large contingencies and forecast allowances to leave the new Premier room to implement their own policy priorities. Premier Clark has not tabled a budget yet, deferring the decision until after the HST referendum.

Now we know what we’re dealing with, I look forward to debating Premier Clark’s policy priorities for moving forward.

British Columbia families will remain vulnerable, burdened with unprecedented levels of household debt — 160% of income — the highest in Canada. More and more people are retiring with debt. Our housing market is weakening and bank economists are expecting a “correction” (aka, decline). Unemployment rate remains high, and is projected to stay over 7% for the next few years. Wages for those who are employed are barely keeping up with inflation.

The reality is that without a robust labour market recovery and real increases in household incomes, consumer spending will no longer be able to drive the type of strong economic growth BC experienced in the mid-2000s.

We’re still struggling with low business investment after years of corporate tax cuts that were supposed to stimulate investment and productivity. It’s not for lack of money: private non-financial corporations held $471 billion of cash in the first quarter of 2011. It’s also not for lack of competitiveness, or these corporations would have invested abroad instead of keeping the cash.

The problems that climate change poses continue to grow. We need an economic strategy what would invest in people and take bold steps to support a greener economy for our province.

On top of these, persistent poverty and rising income inequality threaten our economic wellbeing. We spend too much paying for the consequences of poverty instead of addressing the root causes of the problem. We are not fully using the skills and productive potential of those in poverty or those whose lower incomes limit the kind of opportunities available to them. Even the Conference Board of Canada has acknowledged that not just poverty but income inequality “can diminish economic growth and undermines social cohesion.

These are the types of issues that should be at the center of the economic debate in BC, not what the best type of sales tax would be.

—-

Originally posted on PolicyNote.ca.

Enjoy and share:

Comments

Comment from cangar
Time: August 27, 2011, 2:48 am

I think the anti-HST vote is connected to a sentiment of not wanting any new taxes, and likely, wanting lower taxes overall. Either BC needs to move to smaller government or needs a political party/leader which can shift the public perception toward the benefits of taxation. I don’t see any party or leader willing to do the latter.

Comment from Skinny Dipper
Time: August 27, 2011, 3:04 am

The problem is not the HST itself. The problem is deciding what the HST rate should be and what the income tax rates should also be. I did notice that the higher income ridings of BC supported the HST while the lower income areas opposed it. Why? the rich pay less overall tax with higher consumption taxes and lower income taxes. The poor pay more tax with higher consumption taxes and lower income taxes.

Comment from klem
Time: August 27, 2011, 1:20 pm

The next thing to go will be the carbon tax, the only tax of its kind in the free world. BC will not be joined on this by the rest of Canada as they were told only a few years ago.

Suckers.

Comment from Brandon L
Time: August 27, 2011, 4:42 pm

“Recent research we’ve done at the CCPA shows that the HST is only one piece of an inequitable provincial tax system, a system in which the richest 20% of British Columbians pay a lower overall/total effective tax rate than the rest of us. Much more needs to be done to make sure everyone contributes a fair share to fund the the services and infrastructure BC needs in.”

This was the most important paragraph. Again this was a anti-tax sediment, where in, middle & low income earners did not want there taxes increased et’all. The 80% of British Columbians that pay a higher overall/total effective tax rate than the richest a fact. A number of canadians want their burden reduced to a rate below that of which rich currently contribute.

Even if we decide to increase taxes on the rich, there is absolutely no way for any socialist on the left or right to increase taxes on the other 80% who will increasingly call for large enough reduction in their taxes, that net government revenues will fall for goods & services.

Comment from Brandon L
Time: August 27, 2011, 5:41 pm

Warren Buffet made a good point about how after exclude the corporate tax rate, he has a lower tax bill to uncle sam then his Secretary. However while everyones angry in tax the rich mode. An equally angry mode of reducing peoples taxes like Warren Buffet Secretary is activly growing.

Poll after poll is showing anti-tax is growing among the middle & low income earners. Together they will contribute less & less to government for services & goods. People get their source of information from anywhere. The people of today want to fund/cut this or that. Someone whos for abortion might not be for education, etc etc “They feel not in control of the system” Wages are not keeping of with the cost of living. The cost of maintaining a home is increasing, education, healthcare, energy, food, clothing. The poor are seldom & distraught, the unemployed in tears, with higher prices.

I talked to my Grand Mother Lived DEFLATION. SnowCone 5cents, gas was 18cents, & 15$-32$ to heat a home annually. That’s Deflation.

Comment from Darwin O’Connor
Time: August 28, 2011, 7:15 am

“Even if we decide to increase taxes on the rich, there is absolutely no way for any socialist on the left or right to increase taxes on the other 80%”

The Ontario Liberals and federal Conservatives managed to increase taxes on the lower income 80% with the HST. The BC Liberals nearly got away with it too. The right seems to be able to pull it off.

Comment from cangar
Time: August 28, 2011, 10:03 am

On taxes, people don’t necessarily vote according to what is in their best interests – or at least in their best interests with the assumption that there is a useful purpose for social programs. Several US states which do not have income tax have tried to implement one at various times – driven by Democrats and opposed by Republicans. Polls showed the support for state income tax came from higher income earners (correlated with higher education) and the lower income earners who stood to benefit, on average, voted against state income tax. In those states, such as TN, the shortfall is made up by sales tax which are not as strongly tied to ability to pay as income tax. As far as I know, the Democrats finally gave up trying to sell the idea of income tax.

It really comes down to being able to sell the message that taxes do benefit people who could use the help. Much easier selling a message of “no new taxes” and/or “lower taxes” which I think all major parties are selling these days.

Comment from Purple Library Guy
Time: August 28, 2011, 11:51 am

I think there is a widespread anti-tax feeling among the public. But that’s hardly a surprise. The rich have been working hard, in the media, think tanks and so on, to create an anti-tax consensus. It’s not really that hard to do–backing taxation requires a perception that the results of taxation do more good than the taxation itself does harm, and ideally some kind of perception that the way taxation is done is somewhat fair. The results of taxation are a longer term payoff whereas getting taxed happens RIGHT NOW, and it’s easy to make people think things are unfair to them. And of course right wing governments do their best to ensure that taxation *is* unfair and that the results *don’t* do good. To the extent that they succeed, even voters who aren’t fundamentally against taxation will start to be cynical about actual existing taxation.

The reasons they’ve been doing this are complex but boil down to advantage for the rich; most of us know the story. The easiest way to get a democracy to vote lower taxes for the rich is to lower them at least slightly for everyone and make it hard to spot that the rich get the lion’s share of the reductions. Corporate interests want government put in the position of needing to sell off assets so they can buy them cheap and make money from them; reducing taxes is the way to do that. The general interests of the rich and corporations in doing whatever they want are defended by an ideology lionizing the private sector and demonizing the public sector; one implication of this ideology is small government, lower taxes. And so on.

The BC Liberals are part of this ideology and this “tax the rich less” strategy. I find it amusing that having worked so hard and successfully to create an “anti-tax” feeling among the public, they then got hoist on it when they tried to create a new tax. Poetic justice of a sort.

But we may be at this point–where the taxes on those who make the most, both individuals and corporations, are so low (and the subsidies to them so high) that government parties, if they want to keep the system staggering along, have to actually start increasing taxes on the poor and middle class. But it’s a basic problem for them, especially if they’ve been going along claiming all this time that reducing taxes will increase revenue. The low-tax ideology starts to fall apart. It’ll be interesting to see if this is a one-off, or if other “pro-low-tax” governing parties find themselves forced to increase taxes and provoking revolts.

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