The premise of the HST (Harmonized Sales Tax) is to reduce taxes for individuals and to improve the competitiveness of British Columbia businesses. One hundred and forty countries and five Canadian provinces have shifted to a sales tax system like the HST. It is perceived by the Province of B.C. that this gives those jurisdictions a competitive advantage.
However, when pressed as to why Alberta enjoys no provincial sales tax and no “harmonized” tax, Ministry of Finance staff here in B.C. respond that Alberta is an oil-rich province and thus they are somehow an anomaly. Increasing the sales tax revenues (the HST) would also allow the Province of B.C. to reduce personal and corporate income taxes.
In late May 2009, in light of Ontario’s decision to move ahead with harmonization plus an offer from the federal government for $1.6 billion in gifts (transition payments), the Province of B.C. was ready to get on board the HST bus. After all, $1.6 billion goes a long way to pay for things like infrastructure, healthcare and education. It was decided to mirror the Ontario HST system because it was already being negotiated, which would keep startup costs low. The B.C. HST was to be 12 percent, the lowest in Canada.
Businesses and individuals paid PST under the “old” tax system on most tangible goods (children’s cloths, books and foods were exempt, to name a few). The end user (the person consuming the goods) paid PST. The PST was not a recoverable tax. The Minister of Finance refers to this as an “embedded” tax. The “embedded” context stems from the fact that the business had to try and recover this purchase tax on consumables (not items for resale, but items consumed within the business) by maintaining a sufficient profit margin on its sales.
Under a GST or HST system, businesses providing taxable goods and services are able to recover the GST or HST they pay on goods and services purchased for business use by claiming ITC’s (input tax credits). There are seven percent more ITC’s for businesses to claim in the HST system than were available in the previous PST/GST system. Businesses can potentially lower prices, or can invest in and expand their businesses (noble ideas).
An economic study was conducted in 1997 by Michael Smart, (then) Professor of Economics at the University of Toronto. He concluded that in Atlantic Canada, implementing the HST and abolishing the RST/GST tax system produced a net increase in purchases of capital assets by businesses and a slight reduction in the price that those businesses set with their own customers.
Ironically, here in B.C., there was no similar “reduction” in price to the consumer at the local liquor store when the HST was implemented. Liquor taxes were 13 per cent prior to the HST, and became 12 per cent when the HST was implemented. The BC Liquor Distribution Branch arbitrarily raised the price of liquor when the HST was implemented, which meant that instead of a 1 per cent drop in price, the price simply stayed the same. Thus, the argument that prices in Atlantic Canada fell when the HST was implemented was negated by our own Liquor Distribution Branch.
If the 1997 study – and a handful of others similar in scope – is correct, the HST sales tax reform will lead to increased investment and enhanced economic growth. To that end, both federal Liberal and federal Conservative governments have, over the years, urged provinces to harmonize their provincial sales taxes with the federal goods and services tax (GST).
To further reduce the impact on low and modest income British Columbians, British Columbia is providing a new British Columbia HST Credit along with the quarterly GST credit payments. The annual amount of the credit is $230 per family member for individuals with incomes up to $20,000 and families with incomes up to $25,000. The credit is phased out by four percent of income above the thresholds. As a result, a family of three would be eligible for a partial benefit up to an income of $42,250 and a family of five up to an income of $53,750. About 1.1 million British Columbians benefit from the credit.
Up to five percent of taxable goods in B.C. are eligible for taxing at five per cent instead of 12 per cent. That ratio of five percent is dictated by the federal government. What specific items are chosen to be taxed at five per cent instead of 12 per cent is set by the Province of B.C. British Columbia is providing point-of-sale rebates for the seven percent provincial portion of the HST on motor fuels, books, child-sized clothing and footwear, children’s car seats and car booster seats, children’s diapers, and feminine hygiene products. These items were exempt from the seven per cent PST in the old system. For about 80 percent of consumer expenditures in British Columbia there has been no change in the sales tax as a result of harmonization.
Currently, the Ministry of Finance for B.C. does not yet know if the tax revenues for B.C.’s provincial government coffers are “better” now than they were with the old PST/GST system.
We do know that if the HST is abolished, the taxpayers in B.C. will likely need to repay about $1.6 billion in gifts that the federal government handed to B.C as incentive payments for implementing the HST. That money has already been spent by the Province of B.C., and the only way the province receives money is through taxation (you and me).
The HST agreement between the federal and provincial governments allows 18 months for the renegotiating should either side wish to change the agreement. Even if the taxpayers of B.C. vote to abolish the HST, it won’t go away any time soon. In addition, the referendum makes no statement to reinstate the previous rates of GST and PST if the HST is abolished. The result might be even less palatable than what we have now.
– Arlene Arlow