BC and the HST [updated]
In its first major economic policy announcement, the freshly re-elected BC Liberal government announced that it would be harmonizing the 7% Provincial Sales Tax (PST) with the 5% federal GST, as of July 1, 2010. What is striking about the new Harmonized Sales Tax (HST) of 12% is that it did not feature in the recent BC election in any party’s platform. And yet, according the government press release:
â€œThis is the single biggest thing we can do to improve B.C.â€™s economy,â€ said Premier Gordon Campbell. â€œThis is an essential step to make our businesses more competitive, encourage billions of dollars in new investment, lower costs on productivity and reduce administrative costs to B.C. taxpayers and businesses. Most importantly, this will create jobs and generate long-term economic growth that will in turn generate more revenue to sustain and improve crucial public services.â€
While I am not pleased with a government that hides its intentions from the electorate (and this is not the only case of burying information during the election campaign), in principle a harmonized tax is indeed a good idea. It streamlines the administration of the tax, and moving to a value-added tax is more efficient than a straight sales tax, as it allows businesses to get credit for the tax they pay on inputs (as a deduction off the tax they collect). For exporters in particular, this allows them to reduce their prices by the amount of the tax they pay in imports that previously would have to be covered in the price.
Will the HST create jobs, long-term growth, make us more competitive, enhance productivity and increase investment? I doubt it. There may be some benefits from the new approach but they will be very small in magnitude, largely because investment is less about the supply side that our politicians are always obsessing about, and more about the demand side, i.e. whether the outlook for sales and profits merits making new investments. I would be interested to hear about a single company in BC who, looking at cutting costs or laying off workers, will now make substantial new investments on the basis of the HST.
A bigger reason for the move would appear to be the ballooning deficit the province is facing. First of all, the federal government will be kicking in $1.6 billion in transitional funding. It is hard to turn that kind of cash down. Moreover, the BC government estimates it will save $30 million a year in administrative costs, which is music to a budget cutter’s ears and likely means hundreds of layoffs in the Ministry of Revenue.
The impact on public finances is somewhat unclear. According to the government press release, this will reduce costs by $1.9 billion for BC businesses. This roughly reflects the PST on inputs paid by business. But the government argues that “consumers will benefit as the current PST paid by business is removed from the price of goods” so they cannot have it both ways, painting it as a gain to business and to consumers. Exporters aside, regular companies operating in BC will probably pocket the difference and not pass along the savings to consumers (there is an empirical project in here for an intrepid economist). The government also claims the whole transition will be revenue neutral, so this must mean a transfer of taxes paid from business to consumers.
This brings us to the matter of harmonizing exemptions to the tax and credits for low-income families. A number of basic items are excluded from one or both of the current taxes, and the shift from PST to HST will mean that some previously exempt items for PST will now be covered under the HST. At first glace, the government press release seemed to acknowledge some of these things, by extending “point-of-sale rebates” for:
Fuel: Gasoline and diesel motor fuels, including any biofuel components.
Other items: Books, childrenâ€™s sized clothing and footwear, childrenâ€™s car seats and car booster seats, diapers and feminine hygiene products.
Housing: A partial rebate of the provincial portion of the HST of up to $20,000 on all new housing.
But others have pointed out a long list of what is no longer exempt (I have pasted it below, sourced from the Ministry of Finance via the Vancouver Sun), thereby making up revenue lost on the business side of the equation. Also striking are the choices made about coverage. For example, why is motor fuel exempt but not bicycles? Why are children’s car seats exempt but not school supplies? Why feminine hygiene products but not other medications and vitamins? As part of its climate action plan, the BC government eliminated PST on certain energy efficient products, but it looks like these are now again subject to sales tax. And the tax applied to meals has the restaurant industry up in arms.
The whole point of a general sales tax is that everything should be covered. While one can make the case for exempting basic necessities, the details of picking and choosing what items will be covered undo any benefits of simplified administration. The loss of flexibility to engage is such exemptions for policy purposes could be a downside of the new system — minimally, it introduces delays in implementation if you have to negotiate with the feds every time you want to exempt something (based on anecdotal experience with the HST in the Atlantic provinces).
A much better plan would be to have everything covered but provide generous credits to low- and modest-income families. The existing GST credit does this reasonably well, and the credits against the BC carbon tax already piggyback on the GST credit system. To that extent there is already some measure of harmonization. As a simple but effective poverty-reduction measure, we should aim to double or triple the new HST credit, essentially opening a backdoor approach to some form of Guaranteed Annual Income without entering into the fierce debate that term generates.
So long as the new credit system offsets (ideally, more than offsets) the changes in the sales tax base, then lower-income families will be better off. The government’s Q&A on the HST states that:
B.C. is proposing to provide a B.C. HST Credit that would be provided, on a refundable basis along with the quarterly GST Credit payments. The maximum amount of the credit would be $230 for individuals with income up to $20,000, and $230 per family member for families with incomes up to $25,000. The maximum credit would be phased-out by four per cent of income above the thresholds.
At the maximum of $230 this would mean that an individual with $20,000 or less in income would have to spend more than $3,285 per year on the previously exempt goods and services listed below in order to be worse off. As a back-of-the-envelope calculation this seems reasonable, and if prices on goods and services that were previously taxed do fall somewhat (though as noted I am skeptical about that happening), then the benefit will be greater. However, the phase out rate means there would essentially be no benefit to individuals above about $26,000 of income, so overall there will be an adverse hit for individuals with modest incomes that is problematic. Similarly, the cut-off for families seems strikingly low â€“ yes, there are economies of scale from living together but the threshold of $25,000 for a family is quite low.
Before the HST goes into effect, a final item that should be considered is burying the tax in the price of goods and services. Canada is the only country I know of where the price you see and the price you pay are different. We have gotten used to it but other countries have more transparent pricing by making retailers post the final price not the pre-tax price.
The following goods and services are currently exempt from PST, but will be subject to the full 12-per-cent harmonized sales tax when it is implemented. With the new HST, businesses will be able to recover the PST portion of the tax they currently pay, rather than passing it on to consumers as part of the price of these items. Theoretically, that should mean that prices for these goods will come down by seven per cent as they become subject to the full tax.
– Residential fuels (electricity, natural gas) and heating.
– Basic cable TV and residential phones.
– All food products (only basic groceries will remain exempt under new tax).
– Non-prescription medication.
– Vitamins and dietary supplements.
– School supplies (books will continue to be exempt).
– Magazines and newspapers.
– Work-related safety equipment.
– Safety helmets, life jackets, first-aid kits.
– Smoke detectors and fire extinguishers.
– Energy conservation equipment (e.g., insulation, solar power equipment).
– Personal services such as hair care.
– Dry cleaning.
– Repair services for household appliances.
– Household maintenance such as renovations and painting.
– Real estate fees.
– Membership fees for health clubs.
– Movie and theatre tickets.
– Funeral services.
– Professional services such as accounting and home care.
– Airline fares within Canada.
Source: B.C. Ministry of Finance