The politics of the HST: Economists say the tax makes sense

If you ask most tax economists about the harmonized sales tax, they’ll say the controversy has little to do with economics – the broad-based HST is clearly more efficient for businesses, government and consumers – and a lot to do with political optics.

  • Jun. 10, 2011 5:00 a.m.
UFV professor Hamish Telford talks about the HST.

UFV professor Hamish Telford talks about the HST.

LAST IN A 3-PART SERIES

by Adrian MacNair, Abbotsford News

If you ask most tax economists about the harmonized sales tax, they’ll say the controversy has little to do with economics – the broad-based HST is clearly more efficient for businesses, government and consumers – and a lot to do with political optics.

“Most economists feel the HST is an improvement, and I don’t think I’ve heard any reputable economist say otherwise,” said Hamish Telford, professor of political science at the University of the Fraser Valley.

Telford said there are additional costs to consumers with the HST, but they’ve been offset somewhat with government rebates to low-income earners.

He said the BC Liberals had a poor communications strategy from the outset and that continues to plague them.

When the HST was introduced in July 2009, two months after the BC Liberals were re-elected, it contradicted their own electoral campaign.

Peter Simpson, CEO of the Greater Vancouver Home Builders’ Association, said they, along with the restaurant industry, received a letter of assurance from the government that it wouldn’t be implemented.

“The biggest mistake the government made when they rolled this out was a lack of consultation,” he said.

But Simpson acknowledged the HST benefits the kind of economic growth and job creation that allows people to buy new homes, and said the government has made changes.

Initially, only homes valued below $400,000 were HST exempt, but that threshold was far too low for the Lower Mainland’s hot housing market. Raising it to $525,000 has helped buyers and builders, though it’s still below the regional average.

Simpson said the government could also help by revamping the property transfer tax on new homes. Introduced in 1987 when an average Lower Mainland home cost $112,000, it is still assessed at one per cent on the first $200,000 of value and two per cent on the balance.

Abbotsford accountant Kimberley McLaren said the average person doesn’t know very much about taxes to begin with. People bring their taxes to her, but they don’t know what the tax rates even are. So if it changes, they won’t know.

“Because the HST is in their face every day they say, ‘they’re raising taxes’. Well, yes, but they have lowered taxes in other areas,” she said.

People “panic” when they see the HST as a bigger number, though it’s merely the combination of the GST and PST that already affected 80 per cent of purchases before the change, she said. But they don’t think about the larger HST rebate.

Glen Thompson, a regional organizer for Fight HST, said the fact the HST brought in $1.3 billion in additional revenue either proved the government doesn’t know what it’s doing, or else is deceiving people.

He isn’t convinced by the proposed two per cent cut to the HST by 2014 either.

“Of course, the businesses are happy about this. Without producing anything new they’re getting somebody else to pay their tax bill,” he said.

But Telford said that kind of attitude is a case of “cutting off your nose to spite your face.”

He said it doesn’t make sense to vote against good policy because of the way it was introduced.

Nearly 50 per cent of B.C.’s $5 billion PST revenue was collected from businesses in the production of goods and services, but economists say those business costs were passed on to consumers in the form of hidden “embedded” taxes.

British Columbians paid taxes on goods, but they weren’t visible.

“In some ways it’s the old adage, what people don’t know didn’t hurt them. Now that they see the whole price of the tax they feel hurt,” Telford said.

The poor communication around the HST is the reason for the provincial mail-in referendum, said Patrick Giesbrecht, president of the Abbotsford Chamber of Commerce. But after nearly a year under the new tax system, it’s given the government time to make adjustments.

The proposed two per cent cut to the HST, along with an increase to the corporate tax rate, is a reasonable compromise the business community is willing to make, he said.

If left intact, by 2020 the HST is expected to create 24,400 new jobs in the province.

Thompson isn’t impressed.

He said anybody can invent jobs statistics, but it’s more important to measure the kind of jobs they are and how much they pay.

Thompson doesn’t believe the HST is worth it, even at 10 per cent. There is no precedent anywhere in the world for shifting from a value-added tax like the HST back to a sales tax like the PST. Although there are steep economic costs of returning to the PST, Thompson said B.C. doesn’t have a choice.

“I guess it gets expensive when you get caught in a lie. Unfortunately, we’re going to have to pay the price for their lies,” he said.

Although 12 per cent might be a “bitter pill to swallow” for home buyers, Simpson notes other provinces, like Nova Scotia, have HST rates at 15 per cent. And despite some dampening effects of the HST, he said the province is in better shape keeping it.

Telford notes the irony that many HST opponents are poor and moderate income earners who actually gain under the HST. Low-income seniors are actually doubly compensated because their benefits are indexed for the price increases caused by the implementation of the HST.

He said he hopes people will realize the penalties of going back to the PST, but speculated those who will be the most motivated to vote in the referendum are the ones who are still angry about it.

The province is mailing out voting packages between June 13 to 24, and voters have until July 22 to return them.

Final results are expected in late August.

THE BIGGER TAX PICTURE

The introduction of the harmonized sales tax in British Columbia has met with mixed reviews, ranging from appreciation to anger.

Some of that discontent is based on the perception that the tax is an imposition of yet another needless expense for families at a time when they can ill afford it.

According to an independent panel on the HST, corporations now pay roughly $730 million less tax than before, while the government has received $1.3 billion more in sales tax than expected.

Critics call this a $2-billion tax shift from the business world to the consumer-taxpayer, while the panel estimates the average household spends roughly $350 more per year as a result.

Put into this context, the HST looks like a burden on British Columbians, without taking into consideration whatever economic benefits might offset the additional costs.

But taxpayers have paid significantly less taxes than most other provinces over the past decade, while having a relatively high median family income.

Other than the Yukon and Northwest Territories, where income levels are disproportionately high to the rest of the country, in 2008 British Columbians enjoyed the fourth highest median family income, at $67,890, after Ontario, Saskatchewan and Alberta, according to Statistics Canada.

That’s six per cent more than the median family income in Quebec and just 2.7 per cent below Saskatchewan.

But although median family income isn’t the highest, marginal income tax rates here are among the lowest in Canada, meaning we keep more of what we earn.

Residents pay 5.06 per cent on the first $36,146 of taxable income and 7.7 per cent on the next $36,147.

It’s higher in every other province in Canada, except Nunavut, and provides the most generous tax relief for median family incomes in the country. Only Alberta, which has a 10 per cent flat tax and five per cent GST, provides more tax relief, although those rates were mainly set during the oil boom.

British Columbians are also much better off than they were in 2000, when marginal income tax rates were 8.4 per cent on the first $30,004, 12.4 per cent on the next $30,005 and 14.35 per cent above and beyond that. Which means in the past decade, taxes have been cut 40 per cent, 38 per cent and between 27 per cent and 14 per cent, respectively (income earners above $100,787 actually pay two per cent more now).

When the provincial portion of the HST is cut to six per cent in 2012, B.C. will have the second lowest sales tax in Canada (except Alberta) and when it’s cut to five per cent in 2014 it will be tied with Saskatchewan for the lowest.

As for the effect of the HST on consumer prices, according to the B.C. consumer price index for April, there was a 2.7 per cent rate of inflation from a year ago, 0.6 per cent below the national average.

It may be surprising to note that some prices have even dropped on the CPI.

Fresh fruit is 7.7 per cent cheaper; household furnishings are down 2.2 per cent; footwear is 4.4 per cent lower.

As for apparel, women’s and children’s clothing are down 3.5 per cent and 6.3 per cent, respectively.

It’s not all good news.

The element mainly driving inflation across Canada has nothing to do with taxes, as gasoline is up 19.8 per cent from last year. Since transportation companies heavily rely on motor fuels to move goods, that has a reciprocal effect on consumer pricing.

B.C.’s rate of inflation in the 12 months preceding April 2011 is third lowest in the country, just behind Saskatchewan.

In 2002 constant dollars, $1 is now $1.16 in British Columbia, while Alberta is $1.26, the highest in the country.

The monthly inflation rate for July, 2010 when the HST came into effect was 1.1 per cent, but has since declined to 0.2 per cent.

Source: Consumer Price Index May report, B.C. Stats

PART ONE IN THE SERIES:

http://www.bclocalnews.com/fraser_valley/abbynews/news/123281783.html

PART TWO IN THE SERIES:

http://www.bclocalnews.com/fraser_valley/abbynews/news/123498364.html