Case Made For HST In British Columbia

by Mike Godfrey, Tax-News.com, Washington

11 May 2011

Ahead of a make or break referendum on the future of harmonised sales tax (HST) in British Columbia, a potentially influential report, designed to provide electors with useful information, has argued that, despite the public anger the tax has generated, it in fact represents a long-term boon for the Canadian province's economy.

Introduced in July, 2010, the HST blended the 7% provincial sales tax (PST) with Canada's federal general sales tax (GST), set at 5%, resulting in an overall rate of 12%.

After a four month research and consultation period, British Columbia's Independent Panel on the HST released its report on May 4. The panel was composed of a former Alberta finance minister, an economist, a former British Columbia auditor general, and a banker. Having reviewed over 90 received submissions and examined the positives and negatives, the report has concluded that reverting to the previous sales tax system would cost millions in lost revenue, hit growth, hinder exports and damage the job market.

The report does note the absence of public consultation in the period leading up to the merger, stating that this "led to confusion, anger, political discontent and a petition signed by hundreds of thousands of citizens demanding a referendum to let the people decide". Indeed, the controversy even brought down the then Premier Gordon Campbell, who resigned in November, 2010 over the issue. The wishes of petitioners were in turn granted, and, on June 24, British Columbians will take to the polls in a referendum, which will ask them to answer yes or no to a question on whether to "extinguish" HST and reinstate the PST/GST regime.

As the report states, British Columbia relies heavily on the revenue brought in by its sales tax, which, at 14% of the province's total budget, matches the total provided by all individual income taxes. The PST, implemented in 1949, levied tax on an economy dominated by manufacturing, yet, with the economy diversifying in recent years, the report argues that PST left much of the economy untaxed. On the other hand, HST provides a "broader tax base and a more stable source of revenue". In 2011/12, with more items taxed than before, an extra CAD1.33bn (USD1.38bn) will be paid in sales tax, after rebates and tax breaks are taken into account.

However, the report does not sugar coat the fact that the greatest burden has fallen on household budgets. The average family now pays CAD350 more annually on routine expenditure, and the more a family earns, the more it is likely to spend, meaning the more HST it will face. There is some small relief, though, with the estimated 15% of British Columbians earning less than CAD10,000 a year better off. Moreover, HST costs are partially offset by a range of income tax reliefs, and a considerable amount of household spending is taxed as it was before.

The report breaks down spending habits in terms of their tax liability. 29% of spending remains unchanged. Items included in this bracket are the majority of household goods - namely cars, furniture, electronics, appliances, clothing, footwear and beauty products - along with motor fuels, books, and various child related products. 17% of spending is now subject to an extra 7% sales tax, including restaurant meals, hairdressing, recreational items, tobacco products, professional services, structural home repairs and renovations, and newly built home sales. The remaining 54% of spending is not taxable under either HST or PST/GST.

The greatest long-term benefits will, however, be felt by the business community, in spite of initial problems caused during the implementation of HST. Businesses are predicted to pay CAD730m less in tax during 2011/12, and, with only one tax to comply with, save CAD150m in administrative costs.

The most impressive figures are shown in terms of how HST is expected to impact on the economy as the whole. By 2020, the report argues, the economy will be CAD2.5bn larger than it would have been under PST/GST, with 1.1% higher growth projected. HST would affect a CAD1.2bn boost in additional exports - 1.2% higher than under PST/GST - and generate 24,400 more jobs, resulting in a net 1% increase in employment levels. Business confidence has remained stable, and any negative impact, including reduced sales volumes in restaurants, recreational businesses, and the building industry, will be short lived.

The report also warns of the consequences of a return to PST/GST. A move back to the old system would "likely have a negative impact on businesses and investor confidence because of uncertainty over tax policy". In addition, it would take 18-24 months to do so, resulting in a first year revenue loss of CAD820m, and losses of CAD893m in the second, and an increased revenue gap year on year. Money borrowed from the Ottawa government for the transition to HST would have to be repaid, to the tune of CAD1.6bn.

Ultimately, the report shows, HST has inaugurated a simpler sales tax system which is raising more revenue than predicted.

The provincial government is currently in the process of a public engagement on the subject of HST, and, ahead of the referendum, has invited members of the public to participate in an online survey on the tax. The results of the referendum, expected in August, will be binding.

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