Would sticking with the PST status quo be better for B.C. business than introducing the new HST?

Source: Business in Vancouver May 25-31, 2010; issue 1074

Yes: Jim Sinclair

Tax reform required, but it needs to be reform that reflects public input

These must be dark days indeed for HST backers.

A tax that the governing party said it would not impose is now law and its launch is set for a month from now. The change in plan from no HST to full-on HST reeks of political deception. In fact, no amount of explaining by either the premier or his finance minister will convince even their diehard supporters that their government’s fiscal epiphany wasn’t delayed to avoid any real scrutiny by voters during the May election, scrutiny that would have certainly yielded a different outcome.

Not surprisingly, the HST is creating divisions, but the significant divisions are within the province’s business community and call into question who speaks for whom. John Winter at the BC Chamber of Commerce must be feeling particularly uncomfortable in this regard as local chapters of his organization question his office’s unfailing support for the government’s flip-flopping ways on HST. The same might be said for the anti-tax crusaders at the Canadian Taxpayers Federation who have become strangely silent on the HST issue, a move that raises questions about who they really claim to represent. The divisions within the business community on HST are not surprising because the new tax will create winners and losers.

Retailers, restaurant owners, the hospitality industry and a large swathe of the service industry are all vulnerable because consumers will be forced to absorb the profound tax shift that is so central to HST. Close to $2 billion in tax burden will be shifted from corporations to consumers starting July 1, a shift that many segments of the business community worry will hurt their business.

Well after the decision was made to embrace the HST, the B.C. government has trotted out some surprisingly thin gruel to justify the change. In a 12-page study by fiscal and tax policy expert Jack Mintz, readers are provided with summary data that looks at the impact of the HST in other provinces, specifically the Maritimes. Overlooked, of course, is the fact that when that HST was introduced there, it amounted to a reduction in the combined sales tax. That isn’t the case in B.C.

The HST debacle also raises significant questions about the BC Liberals’ entire tax policy agenda, which is a decade old and has failed to deliver the promised results that underpinned its implementation in the first place. B.C.’s employment growth is lower today than it was in the 1990s. Investment in machinery and equipment, a key driver in generating much-needed productivity growth in the province, has barely budged. Even before the recession began in 2008, the forest industry had lost almost 24,000 good paying jobs. B.C.’s per-capita GDP is lower than it should be, our productivity is behind Alberta and Ontario and our wages are below the Canadian average.

Ten years of BC Liberal-designed tax policy have created a self-inflicted revenue problem for the provincial treasury. It was entirely predictable that steady and persistent, but most of all, unwarranted tax cuts would create enormous revenue problems for our province. Now, 10 years on, we don’t have enough money to pay for even the basics like education for our kids or decent care for seniors.

B.C. needs tax reform, but the HST is taking our province in the wrong direction. B.C. needs tax reforms that re-establish the ground rules for how taxes are shared across all income groups and businesses. We need tax reform that honestly recognizes the important economic and social benefits that public services provide. But most of all, we need tax reform that reflects real public input, not shifty manipulation by folks in the premier’s office who want to avoid scrutiny and tough questions. •  Jim Sinclair is president of the British Columbia Federation of Labour. He can be reached at exec@bcfed.com.

No: Niels Veldhuis

B.C. businesses and the province’s citizens will be better off under the HST

With the rhetoric coming from the anti-HST camp, you would think an economic apocalypse was just around the corner. British Columbians, however, should not to be misled by the misinformation surrounding the HST. Replacing the PST with a harmonized sales tax (HST) will greatly benefit all British Columbians.  It will make B.C. more competitive, increase business investment, enhance job opportunities and provide long-lasting economic benefits.

To understand why the move to an HST is beneficial, British Columbians need to be aware of the problems with the current PST. The most damaging aspect of the PST is that it applies to business inputs as well as many of the goods and services that consumers buy. For example, when British Columbians buy a bottle of B.C. wine, they pay the PST on the final price at the liquor store. In addition, however, the wine-maker must pay PST on production supplies (inputs) it uses to make wine (i.e., bottles, labels, corks, equipment used to grow grapes).

When businesses are charged PST on production supplies and other inputs, costs increase and they are passed on to consumers in the form of higher prices.
In other words, the PST that businesses pay on inputs is a hidden tax that is embedded in the price of goods and services. The embedded sales tax is also contained in B.C.-made products that are currently “exempt” from the PST being charged at the till (i.e., restaurant meals, dry-cleaning services, membership fees, newspapers).

The HST, on the other hand, is a “value -added tax,” much like the GST. That is, businesses will receive refunds (tax credits) for the sales taxes they pay on inputs. Removing the sales tax on business inputs will reduce the costs of producing goods and services in B.C., and these savings will be passed on to consumers through lower prices. But don’t take our word for it.

Past experience with sales tax harmonization in Canada shows that businesses do pass on the cost savings to consumers. In 1997, three Atlantic provinces (Newfoundland, New Brunswick and Nova Scotia) harmonized their PSTs with the federal GST. Professor Michael Smart of the University of Toronto examined the effects of harmonization in Atlantic Canada and found that consumer prices in the harmonizing provinces fell after the 1997 reforms. Not only will prices decrease, but the costs to businesses of investing in machinery, equipment and technology (computers and software) will also be reduced.

Since the PST applies to business inputs, including much of the machinery, equipment and technology firms buy, it impedes business investment. Under the HST, lower taxes on investments will spark more business investment and development. This will ultimately make B.C. workers more productive, drive up their wages and improve employment opportunities.

Here again, past experience with sales tax harmonization in Canada is telling. Smart found that per-person investment rose by more than 11% in the harmonized provinces compared with the non-harmonized provinces after the 1997 reforms in Atlantic Canada. In addition, professor Jack Mintz of the University of Calgary has estimated that harmonization in B.C. will account for an $11.5 billion increase in capital investment and a net increase of 113,000 jobs over 10 years.

British Columbians would do well to ignore the anti-HST rhetoric. The HST will improve the investment climate in the province, which will ultimately benefit British Columbians through higher rates of economic growth, more opportunities and a higher standard of living. • Niels Veldhuis is the Fraser Institute’s vice-president, research. This column was co-written by Charles Lammam, policy analyst at the institute.