BC Residents Could Save With 10% HST: And they stimulate the economy in the process

Commentary, Taxation, David Murrell

Last year, BC residents were upset when the Liberal provincial government imposed the new Harmonized Sales Tax (HST). In 2010, the BC government kept the tax rate at 12 percent (7 percent provincial, 5 percent federal). With the tax change, BC households paid more.

Last year, in a published report for the Canadian Centre for Policy Studies, I estimated that the new HST would cost the average BC family an extra $490 in new sales taxes paid (all numbers are in 2008 dollars). Factoring in the announced personal income tax credits and grants, the average BC family still would pay an additional $320 in net taxes.

But this year, the Liberal provincial government promised to cut its provincial portion of the HST from 7 percent to 5 percent, such that BC residents will, by 2014,   pay a total 10 percent HST. The change prompted me to re-do my calculations incorporating the forecasted reduced tax rate, but keeping all other assumptions exactly the same as in last year's study. These new calculations appear in a new study just released by the Frontier Centre for Public Policy.

With the 2 percent cut, I now find that BC households would pay less (not more) in total taxes paid. Families will save about $255 in taxes paid (again in 2008 dollars) from what they would be paying under the old RST tax system.

The total tax savings come from three sources. First, taxes paid on old RST-taxable goods (drug-store items; adult clothing; etc.) are now reduced from 7 percent to 5 percent provincial tax. Second, BC businesses can write off taxes on material inputs and capital spending – and most of these savings are passed on to consumers. Third, the BC government brought in personal income tax credits to help compensate for the new HST.

Indeed, the consumer savings that will be enjoyed by BC residents, given the reduced HST, reflect a similar experience by residents of three provinces in Atlantic Canada in 1997. Then, the three provinces (Nova Scotia, New Brunswick and Newfoundland and Labrador) agreed to reduce their sales tax rate to 8 percent, but to expand their sales tax base to include most consumer services. In a published study I did back then, I found that residents in these three provinces paid less sales tax as a result.

The new HST tax is now a "win-win" policy for consumers and businesses. Consumers gain through less taxes paid. Businesses gain through tax write-offs and less red tape, given that they pay taxes, and fill out one form, to one tax collection agency instead of two.

Export businesses (exporting internationally and to the other nine Canadian provinces) gain relatively more. They charge no HST to non-BC customers, but can write off sales taxes on material inputs and capital spending. So the HST tax stimulates exports, and thus advances economic development.

Think of it this way: the protest politics in Prince Edward Island were so strong in 1995 that the province chose to stay with the old PST, set at a high tax rate of 12 percent. To this day the province still levies that high sales tax rate, and residents have been paying much more than they would under an 8 percent HST tax and missing out on the related benefits of a reduction. By contrast, BC residents now have the opportunity to vote to keep the HST, but with the promise of a rate reduction of two percent, paying less under the 10 percent HST tax rate.

As a person living in New Brunswick, I am not familiar with the political intricacies of British Columbia. I deal only with hard economic statistics. Last year, my calculations indicated that BC residents would pay more taxes with a 12 percent total HST rate. But my new study shows that, with the new tax cut, households now pay less than they would under the old RST tax system.

If I were a BC voter, based on this evidence, I would vote "no" in the HST referendum.