Serving up the HST: Impact on the service industry

When it comes to the harmonized sales tax, some businesses in Abbotsford have fared better than others.

  • Jun. 8, 2011 2:00 p.m.
Michael Dicks

Michael Dicks

PART 2 IN A SERIES

by Adrian MacNair, Abbotsford News

When it comes to the harmonized sales tax, some businesses in Abbotsford have fared better than others.

The type of business is a key factor, since an independent panel on the HST said last month the tax tends to have an initial negative impact on companies that provide services.

That’s particularly true for restaurants.

Michael Dicks, owner of Q Steakhouse on Gladwin Road, said the food service industry always sees a decline with new taxes because it’s the first luxury item consumers cut back.

Dicks estimated the industry is down 20 per cent because of the HST, but he remembers a similar impact with the introduction of the GST in 1991.

“The restaurant industry bombed,” he said. “It was just a huge, massive decline.”

Dicks said the greater impact has been the tougher drinking and driving laws, which came into effect Sept. 20.

Alicia Bodlay, co-owner of Restaurant 62 on McCallum Road, agrees.

She said the alcohol laws, coupled with the economic downturn and an increase to the minimum wage, has made it almost impossible to isolate blame on the HST.

The panel’s report indicates only 17 per cent of total consumer spending has been impacted by the HST, but service-based industries – which employ 80 per cent of the total workforce in the province – have faced two distinct challenges.

The first problem, explains Ian Tostenson, president of the B.C. Restaurant and Foodservices Association, is there are no tax savings because restaurants don’t pay taxes on food items or labour. Secondly, the additional seven per cent on a restaurant bill shrinks business margins, since the restaurant has to choose between upsetting customers with the price increase or trim their profits.

Tostenson said the percentage of the market, or “share of stomach,” of dining out versus eating in was reduced to 39 per cent from 46 per cent after the GST was introduced. That eventually rebounded to 43 per cent, but there was a permanent loss and he expects the same from the HST.

Peter Leitch, co-chair for the Smart Tax Alliance, said there are going to be some initial “winners and losers,” but eventually most businesses in the province will benefit from the HST.

If the economy grows and creates jobs – which the panel concluded will happen with the HST – Leitch believes restaurants will benefit commensurately.

“If we have a healthy business then we’re certainly going to use restaurants more than we would otherwise,” he said.

Leitch said the nature of consumer pricing is based on the cost to the business providing the product or service, so if that cost goes down then the price will as well, in part due to competitive pressures.

Ben Besler, former regional Fight HST organizer and roofing business owner in Chilliwack, said the extra seven per cent on his services has impacted his company.

Although the government has since announced a two per cent reduction of the provincial portion of the HST by 2014, Besler calls it “a bribe to buy into the service.”

The panel revealed the HST has brought the province additional revenue of $1.3 billion, contrary to government claims the tax would be revenue-neutral in the first year. That has come mainly at the expense of the service industry and the consumers who support it.

But Patrick Giesbrecht, president of the Abbotsford Chamber of Commerce, said although the rise in costs for services upsets some people, they often don’t realize prices have either dropped or remained stable in other sectors.

He said it’s “a bit of a paradox” that the people who tend to be the angriest about the tax are the ones who will either be the least affected by it, or actually benefit with HST rebate cheques because of their low income.

Dicks said he’s had to cut back on staffing, but the industry will slowly rebound.

“Some people have stopped spending or going out, not because they can’t afford it, but because they’re p…d off,” he said.

But if the HST is abolished, people aren’t necessarily going to start eating out more, he acknowledged.

The HST recently received an unlikely expression of support from the tourism and hospitality industry, with business leaders saying the potential economic growth in the long-term outweighs the challenges.

Tostenson said the HST is generally beneficial for B.C., but needs to be reworked to mitigate harm to restaurants.

“The government’s a little bit mad at the restaurant industry, thinking we’re all anti-HST and we’re not,” he said.

Bodlay is one restaurant owner who wants the HST to stay.

“I think the lowering of the tax by two points will probably give people an optimistic view of spending more money and that is hopeful for us,” she said.

Leitch said the HST will give the province a balanced budget without raising income taxes, while sustaining important services such as health care and education, both of which outpace the rate of inflation.

But the anger at the HST hasn’t gone away since the successful petition initiative culminated in the upcoming provincial referendum on the tax, said Besler. He has noticed the increased costs in his personal spending – the panel estimated the average family spends $350 more per year under the HST– and that’s why he’ll vote to bring back the PST.

Bringing it back won’t be easy, or cheap. The panel estimated the province would lose $820 million in the first year, have to reinstate provincial tax offices which cost $35 million each year to operate, and possibly repay Ottawa $1.6 billion it received under the HST agreement.

If left intact, by the year 2020 the HST is estimated to grow the economy 1.1 per cent and create 24,400 more jobs than it would under the PST/GST.

The Fraser Institute released an analysis on the HST June 3 estimating the average B.C. family will pay $953 less in sales tax in 2014 with a 10 per cent HST rate, though increased corporate taxes would reduce overall tax relief to $750. It also said eliminating the HST would only reduce the tax bill of an average family by $73 a year.