Voters in British Columbia exercised their democratic right in a referendum to kill the HST. Angry at a tax introduced only weeks after the last election, the voter’s fury has been expressed in a ballot by a margin of 55% to 45%. The HST will be extinguished and the province will return to the previous retail sales tax.
Tax reform is an art and, unlike Ontario, which did a better job selling the HST, the B.C. government failed to deliver the goods. Those who pay more tax voice strongly their opposition. Those who benefit tend to be muted. Tax reforms do successfully take place in Canada and many parts of the world, but the voters must understand their importance for the reform to succeed. Some 140 jurisdictions have adopted value-added taxes since the middle of the last century. Four of the five countries that did abandon the VAT later reintroduced them.
The introduction of the HST in B.C. was a breach of trust for many voters. This anger, however, comes at a welldocumented economic and social price.
Joining Manitoba, Prince Edward Island and Saskatchewan, B.C. will return to being one of the most uncompetitive tax jurisdictions, with an effective tax rate on capital almost 50% more than the rest of Canada and the world, for that matter. This will certainly please Alberta and Ontario, the two provinces that attract the lion’s share of capital in Canada, as they more ably attract businesses with a far better tax regime. As a result, B.C. will likely lose more than 100,000 jobs over time (more than three times the independent panel report’s forecast, which erroneously underestimated the sales tax rate for capital goods).
The poor will be worse off, with a potential loss of refundable sales tax credits and higher taxes on food and certain necessities (since the HST relieved any sales taxes on business inputs in producing these products).
The province, meanwhile, loses a modern sales tax that would have provided reliable funding for future public services, such as health care and education. A significant weakness of the retail sales tax is that it is exempts many services, which are the faster-growing parts of consumption.
And the voters should expect the federal government to require a repayment of the $1.6-billion transition payment, as agreed upon should the retail sales tax be reinstated. Otherwise, contracts are not worth the paper they are written on and voters in other parts of Canada will be angry at having put up tax dollars for a rescinded promise.
B.C. voters will also need to deal with $3-billion in spending reductions or tax increases to pay off the costs in reinstating the provincial sales tax. They also gave up the province’s offer to reduce the sales tax rate by two points if the lucrative HST is maintained (although the corporate income tax rate would have been raised to make up for some of the revenue loss).
With the HST fiasco, no government will want to touch sales tax reform in the near future. When time passes and the anger dissipates, the critical issue will be what the province should do to repair the damage to its competitiveness and reliance on an outdated sales tax.
One option will be to reform the retail sales tax over time following steps introduced by the province during the past decade. It could broaden the tax base to include more services and add to tax exemptions for capital and intermediate inputs to make the sales tax into a proper consumption tax. Unfortunately, given the mechanism by which the retail sales tax operates, it will be difficult to improve it dramatically unless it establishes some sort of rebate system for sales taxes on business inputs. (This was the start of the VAT in France, which had a turnover tax at that time.)
Alternatively, the province could look to reduce sale tax rates over time by cutting spending, primarily health care and education, or by increasing other taxes. Income tax increases would not only be highly unpopular but would also most hurt competitiveness. Nonetheless, expect the NDP to push higher taxes on the rich and corporations in the next election, even though killing the HST, as advocated by the NDP, is hurting B.C. public finances. Other taxes could be increased, such as excise taxes, including the B.C. carbon tax, but these would be tough sells as well.
Or the province could consider an Italian-type tax by turning the retail sales and corporate taxes into a business value tax that is levied on revenues net of the cost of purchasing goods and services from other businesses. This reform, also considered by referendum-happy California, could have some political appeal if there is a shift from sales taxes visible to consumers to equivalent sales taxes indirectly paid by businesses. After all, during the HST debate, many B.C. voters believed that businesses don’t pass tax reductions on to consumers. If sales taxes are converted into business value taxes, voters might be prone to believe that this reform may not affect consumers by raising prices. If people can be fooled this much, why not adopt a business value tax?
Of course, another option is to do nothing, which will likely be the case for many years to come. If so, B.C. will mosey along, attracting many retired elderly because of its good weather, but less robust job creation to pay for elderly benefits.
B.C. voters made a dramatic choice to exercise their democratic rights, but at a significant cost to themselves. Perhaps they should have waited until the next election “to throw the bums out” rather than compromise the economy and public finances by extinguishing the HST. A decision that will be regretted later.