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:

“This is the single biggest thing we can do to improve B.C.’s economy,” said Premier Gordon Campbell. “This 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.”

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, children’s sized clothing and footwear, children’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 – 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.

HARMONIZED TAXABLES

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.

GOODS

– 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.

– Bicycles.

– 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).

SERVICES

– 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

32 comments

  • Good analysis. agree with you 100% on requiring retailers to include tax in displayed prices. Very frustrating as a recent arrival on BC to be trying to guess whether tax needs to be added and how much it should be.

  • An HST is good in theory, but in practice, with THIS type of HST, it is going to hurt a good many British Columbians who are living at or below the poverty line.

    If Mr. Campbell kept the currently non-taxed items and services untouched, there would be absolutely nothing wrong with putting in an HST. In fact, I would be all for it! But thats not the reason we are having this tax forced upon us. Its to pay off the Olympic deficit and grease the backs of Campbell’s support base.

    I dont know about anyone else, but for me – taxes are something I ALLOW the Government to collect from me so as to pay for programs and things that society or myself need. They are NOT something that the Government can impose on me without discussion – be it directly with me via a referendum, or in the Legislature with my representative. This is a tax hike, and an abuse of power by the Government.

    Sign the petition to stop this tax:
    http://www.tiny.cc/stopthehst

  • Very good points, Marc.

    I’m still having trouble understanding how imposing the new HST on a great number of goods and services that were previously exempt from PST can constitute a revenue-neutral move from the government’s perspective. If Russ above is right that it’s a tax increase, then how come the government wouldn’t be collecting more revenue?

  • I’m more keen on the HST because of the deflation threat. In our current deflationary environment, there is a real risk of people delaying purchases in anticipation of future price declines. If the HST actually increases prices by a small percentage, then postponing purchases becomes unwise. It’s odd the government hasn’t highlighted this.

    Like the Carbon Tax, this issue is going to split the NDP. The Liberals have found a winner; regressive taxation harms the poor and strengthens the public sector. If you are both a class analysis type and a supporter of strong public services, you would have mixed feelings about both the tax itself and campaigns to oppose it. Then politics transparently becomes an issue of “our bastards are better than their bastards” which can’t be good for fundraising or volunteerism.

  • we were just about to start on 2 new entry level houses in North Vancouver. while this will add a minimum of $45,000 per house to the cost for the buyer ,after next July ,none of the PST inputs will be available for credits to the builder. basically that leaves us no choice but to wait til after next july before we think about starting…. doesnt seem like “stimulus” to me . ( 2 wonderful building lots for sale in North Vancouver)

  • Iglika,

    What about PST applied to business inputs. These would simply be passed on to the consumer. I know there are some exemptions for business inputs, but not all. The government is simply removing the burden from businesses to consumers. That is how it is revenue-neutral. But businesses really pay taxes anyways. Taxes are always paid by people in some form. Shouldn’t the government simply increase the HST Credit for low income earners the same way they did with the carbon tax?

  • What I meant to say was: do businesses pay taxes anyways? My anwser is no they don’t, only the owners, workers and consumers pay taxes levied on business.

  • As I have argued before, the supposed “competitiveness” benefits of harmonization are vastly overstated.

    Thanks, Marc, for calling the BC government on its claim that harmonization will be a boon to business and that business will pass all of the savings onto consumers. I have tried to call the Ontario government on the same claim regarding its quasi-harmonization. Indeed, they cannot have it both ways.

    In theory, it makes sense to tax business profits rather than business inputs. However, the removal of sales tax from business inputs (via harmonization) never seems to be accompanied by a corresponding increase in the corporate income tax rate. On the contrary, both BC and Ontario are slashing this rate to just 10%.

    Stuart makes a good argument that announcing more tax on consumer products at some point in the future may induce more consumer spending between now and then. However, Mike makes a good countervailing argument that announcing less tax on business inputs (e.g. construction materials) at some point in the future may induce businesses to delay buying inputs until then. Overall, I suspect that harmonization provides no net stimulus.

  • Wouldn’t a removal of taxation on business inputs have a similar effect as a corporate tax cut. Isn’t the idea to increase the rate of return to investors to encourage investment? Secondly, how can we say that the tax will not have any impact on investment in the province. I do not think simply removing the tax will result in increased investment in itself, but is it not reasonable to assume that when firms do decide to make investment decisions, that due to the higher rate of return on investment there will more investment in projects that would not have taken place with the PST?

  • Chris, thanks for your comments.

    One brings me back to the point that supply-side measures aimed at increasing investment generally do not work, or more precisely, investment is highly inelastic with regard to investment costs. This would include corporate tax cuts, R&D tax credits, deregulation, all policies our federal and provincial governments have lavished on corporate Canada in order to promote greater investment. Empirically, investment is strongly related to strong market demand for the product being produced. If that is strong, or the outlook for sales and profits is strong, it will translate into more investment.

    You are correct about distinguishing that business taxation is generally shifted onto owners, workers or consumers, but to what degree is empirically not well known. There is a strong case to be made that corporate income tax is paid by owners, at least up to US or global rates of taxation, and is therefore progressive taxation. Corporate tax cuts in recent years have generally been a gift to the richest among us, and have served to enhance the growing inequality we have been seeing.

  • Chris, for an investment with a guaranteed pre-tax profit, a dollar of corporate tax would indeed have the same effect as a dollar of sales tax on inputs. But the two taxes are different if the company is uncertain about future profits/losses from the investment.

    Corporate tax will be proportional to the amount of profit actually generated. If the investment loses money, it owes no corporate tax. Indeed, its loss could be deducted from the profits of the company’s other investments in filing corporate tax.

    By contrast, sales tax is insensitive to profit. It is paid on inputs even if the investment loses money. This cost could potentially turn a small profit into a small loss.

    Corporate tax shares in the upside of the company’s risk, whereas sales tax lowers both the upside and the downside. Theoretically, I prefer corporate tax to sales tax on business inputs and could support a shift from the latter to the former. However, for the reasons outlined by Marc, I oppose an overall reduction in business tax.

  • Wow. Just wow. Where did you get this theory from? What does it look like? Did you make it up yourself? Enquiring minds want to know!

    Seriously. Just because you’re a self-described progressive doesn’t mean you don’t have to do your homework. And it certainly doesn’t mean that you can pretend that no-one else has examined this problem and come up with completely different answers.

  • Stephen, I am not entirely sure what “theory” you are asking about. The premise of my previous comment – that corporate income tax is proportional to profit while sales tax applies regardless of profit – is just a statement of fact.

  • “The premise of my previous comment – that corporate income tax is proportional to profit while sales tax applies regardless of profit – is just a statement of fact.”

    Yes and that is the reason why corporate America lobbied so hard for tax on profits rather than sales taxes after the second world war. I will find the reference to the relevant senate and house submissions.

    Now as far as owners are concerned the ideal world is a zero tax on profits and zero taxes on capital world with all taxes levied on consumers/workers.

  • This is what we get for putting the liberals in power again. I was praying that liberals would go down the drain. Since this idiot Gordon Campbell took over, It’s been nothing but rising cost of living for us British Columbians. You can’t even afford to mortgage your own place with out making atleast 100 thousand dollars a year. How many people makes that amount of money. I hate to be complaining but what is happening in this province is unacceptable. We should have sent him a message last election. If it were up to me, I would put stupid Gordon Campbell in jail for making poor people stay poor or even worst. I hope he burn in hell when he die

  • Question: HST is a federal tax, what portion of this increase in tax collected is going to come back to the province of BC? In my opinion, the HST is a federal tax grab out of the pockets of every citizen in BC.

  • Dee,

    The HST is harmonized taxes. The two taxes are provincial and federal. The government collects the tax, but the province will still get 7% out of the 12% collected. The federal government only gets the GST portion which is 5%.

  • Nicole Desharnais

    No HST thanks! Gordon and friends can afford to take a pay cut. I can’t afford another tax.

  • The HST concept is overall a good idea. To have the GST and PST apply to the same things should make collecting the tax easy and mores cost effective. The fury of BC voters is due to the tax grab by the BC government – currently the Liberals. The Provincial portion of the proposed HST will suddenly be applied to a great number of goods and services previously exempt. BC and the other provinces should only consider implementation if the Federal government removes the application of their portion to a number of “necessary” items as noted above. That will not happen as it means no additional provincial revenue and would require actual leadership on the part of BC Government.

  • Government is in big trouble that is more the truth so if you have a couple a billion I’m certain there is very little Mr. Campbell would do to get his hands on some much needed cash.
    The HST tax is going to hurt, hurt, hurt and then some more as jobs losses continue to add up and this is like throwing a wrench into the whole operation as many a small business will go bust. As sm bus already is having great difficultly because of the recession and this is like writing these poor business owners a death certificate.
    Is this like the Olympics and how good it was going to be for British Columbians as heard today your on the hook do to the recession and got to pay, pay, pay.
    I’m postive there is a whole lot more as there is no money as the money is gone and British Columbians troubles have only just begone. You sure know how to pick them and can’t blame the NDP as voters desipte over 80% feeling the premier couldn’t be trusted 22% of citizens elected the lying premier. Over 50 thousand have already signed one petition against the tax and its a sure sign the premier is no winner with the people. Just wait until the citizens find out how much tax payers are on the hook for the Olympics, that should be good for a riot.

  • And to the guy talking about strong public services, what a joke that is as services have just about dried up in this province. as government has got used to using the cash for “others” As Campbell gets into office and cuts back all services except those to politicians and friends, leaving BC children in crisis state or better off dead as children left with their Stong public services where are you living not in BC as there is not a Ministry that hasn’t been stripped down to the bare bones prior to the recession and now there is no cash as some are going to ending up goners as elderly and young play victim to the cuts as Family and Children operating on a 60% shortfall. Only problem with very little cash as transfer payments aren’t what payments were and hundreds and thousands of new residents that haven’t paid into the system also get put on hold as Health Care also in dire straights. What is the worst thing for a recession and a troubling economy? A added tax on consumption. And no worry about the costs getting to low in BC as a loaf of bread makes its way to $5.00 as rents in the Olympics city get passed onto consumers.

  • I guess this tax hike mean my restaurant and fast food days are over for good.

  • Why be so concerned – just hop accross the border and buy all your goods there and eat in their restuarants.

  • I don’t understand all the commotion. Lets be real: if you can afford to eat out, you are NOT living in poverty and can afford to suck it up. Any economist will tell you that its a good plan, or at least better than how taxation works here right now. I agree that how they went about it was a bit sneaky and sleazy, but I’m fine with HST. My family is not rich by any means – we have our struggles financially – but I fail to see how HST will negatively affect us.

  • “I don’t understand all the commotion. Lets be real: if you can afford to eat out, you are NOT living in poverty and can afford to suck it up.”

    I wonder if this includes people eating out at fast food outlets like MacDonalds?

    I think it’s worth remembering that in the 1980s when the Federal Govt first proposed the GST, originally called NST (National Sales Tax) they were proposing to tax groceries. Federal Finance only backed down on that because of public complaints. They were wedded to the idea of a universal retail sales tax that would remove the tax burden from business and place it onto consumers.

    The theoretical excuse is to minimize distortions, but in fact this is merely a convenient fig leaf for a major transfer of the tax burden from business to households. You won’t hear these same economists complaining about “distortions” in the tax system when some business expenses or investments get prefered tax treatment, thus “distorting” business procurement in certain directions.

    The overwhelming enthusiasm of university economists for carbon taxes, and the vehement insistence that a cap and trade system is insufficient, is driven by the same underlying calculation, a desire to shift the tax burden away from income taxes and towards transactions and sales taxes, and towards transactions and sales taxes borne directly by households not business, as is the case with the carbon taxes paid by primary producers in Scandinavia.

  • Very good analysis, i’m just doing a report for a public fiance economics class on the HST. The article my teacher gave us is very pro HST. But i was still confused. So i just wanted to thankyou for your article i can now see that HST isnt as great for consumers as they hype it up to be. Also it disorts economic decisions such as the Gas Exemept but Bikes not? encourages gas consumption while a good tax should not distort consumer decsions,.

  • Sam,

    Bad strategy for your paper. The best you can do is argue HST yes but with a commitment to do redistribution after the fact to make the tax less regressive. The question over gas versus bicycle taxes will probably fly. So there is some room for argument there. But coming out against consumption taxes in a public finance class is like coming out against *free* trade in an international trade class. It is not the point of the class. If you were in political science you might get points for trying to go against the grain.

  • Citizens, must first realize the Premier of BC, has shown time and time again, he has no concern for the elderly, nor for anyone living in poverty. Everything Campbell does is geared to increase his own personal wealth. He accepts all bribes, he sells our provinces resources, he has a criminal record, of a DUI, which he sniveled, begging for the peoples forgiveness. Which, we were idiots enough to let him off the hook. We got what we deserved for that forgiving, a kick in the chops, that’s, Gordo’s style. The evil of Campbell, turns the stomach. Canadians have to learn to believe nothing that comes out of any politicians mouth. There will be, more treachery to come.

  • This govt. Is supposed to be for the people and by the people if the people are not satisfied then they hit to the streets. Why don’t us as canadians stand up for our rights and do something???? We have had a history of the govt. Ripping of innocent people by doing things like this and all it would take is a spark and the right person. We could stop this!!!!

  • Here is a link to one of our articles about the potential reality if the HST was to become revoked…

    http://www.vancouverobserver.com/politics/2010/06/23/unhappy-reality-revoking-hst

  • The rich like members of our BC liberal Gov. get richer while the working class get taxed to death. Time to clear the whole dishonest gang out and make them work for a living like the rest of us.

  • When the GST was introduced a 7% tax replaced a 13.6% tax. Similarly when the HST was introduced in other provinces the rate was reduced from the previous PT rates. There would be no need for low income credits or other personal tax adjustments had the HST been brought in at 10% instead of 12%.

    This could have been accomplished by increasing corporate taxes to cover the short fall thereby making the HST shift revenue neutral to both individuals and businesses.

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