Sunday, January 23, 2011

Repeal of the HST, then what?

If, as I think is likely, the HST is defeated by the public, there is a need to consider how we deal with the loss of tax revenues.   There are several options and really none of them are particularly good for BC.   The government will have a large revenue source to make up for if the HST is elimnated.

The primary problem comes from the fact that the existing PST should have been transitioned to some from of value added taxes decades go but this was not done and we continued having a tax that was acting as a brake on development of the BC economy, especially when it comes to the resource and manufacturing sector.   Some government at some point had to deal with the PST.  Now that we finally have a much more economically progressive tax odds are it is going to be scrapped, but how do we replace the 12.5% of the budget revenues it represents?

The worst option would be to return to the PST.   The PST has restricted job growth in BC for years.    Returning to the PST will see an immediate loss of many retail jobs, but it is also going to stop or slow many large capital projects.   Return to the PST will also cost government and business a lot of money to administer and collect the tax.   Return to the PST will also increase the price of building all most anything as the cost of building materials will rise.

A new PST that is a value added tax.   For the new PST to have as much revenue as currently raised, odds are we would need a new PST that is closer to 10% to 12%.   If that is not done, we will end up with a budget deficit.   The idea that we would have a provincial value added tax and a federal value added tax being collected at the same time is an odd duplication.   The restaurant industry would be happy with this, the retail sector much less so as they are likely to see a rise in the total taxes they have to pay. 

These really are the only two options on how to reintroduce a sales tax of any form and both will cost BC jobs and increase costs to government.  

Likely the single long term best solution, if we are not to have the HST, is to have no provincial sales tax of any sort.    This will be a huge hit for the BC government, about 1/8th of our provincial government revenues will be lost through doing this.   To fill this the government will have to raise some taxes but that will not be enough.   There will have to be some dramatic cuts to government to fill the gap.   There would have to be a radical restructering of government.  Lucky for us the timing is right to do this as the recession is over and the timing for a major downsizing of government is right for the economy.

This would of course be hugely unpopular and no government has the guts to do it.

What people keep missing over and over again in the HST debate is the problem we have in Canada of how we tax.   We focus much to much on taxing what people earn and not taxing on what people consume.   We make it harder for people to earn the money they need by taking so much of their income from them at source.   We make it harder for people to save by easier to buy things.    Our current tax system rewards consumerism but penalizes thrift.

For the medium term we can likely live with this, but in the long term this problem we have with tax policy will lead to increased poverty and fewer government services.  At the same time the amount of debt carried by the public will rise to unsustainable levels.

In looking around BC, I see few examples of serious problems because of the HST and at the same time we have seen a drop in costs in BC since the introduction of the HST.  For a long time in inflation in BC has been higher than the national average, since the introduction of the HST it has been lower.

The impact of the HST on capital investment in BC is not something I would expect to see in the short term because major capital projects take time to move forward.  One new major mine in BC because of the cheaper capital costs would bring in several billion in investment, significant tax revenues, and many high paying blue collar jobs.   The time frame for a new mine is long, we are taking years to more than a decade.

One new mine would more than make up for the loss all the jobs in restaurants because of the HST.


Tim said...

A couple of thoughts
I still think the battle over the HST is far from over and there are a couple of key issues to be resolved. One is that everyone who has studied the harmonization issue over the years including former BC NDP finance ministers such as Elizabeth Cull and Paul Ramsey knew that once and if Ontario adopted harmonization the size of its economy would make competitive pressure so strong that eventually everyone else would have to go along. Nothing that has happened so far in the last year leads me to challenge this assumption in the long run. Admittably competitive pressures from Ontario are much stronger in someplace like Manitoba or Saskatchewan than BC. Second some like Bill Tieleman have surmised that "maybe" Ontario would get rid of the HST under a new provincial govt in the fall in kind of weird bank shot reaction to what has happened in BC.
There are a few problems with this theory. First Ontario would owe back a TON of money to Ottawa to get rid of the HST and would literrally bankrupt the province in the process. Thus while the opposition parties in Ontario complain bitterly about the HST I suspect they realize an explicit promise to get rid of the HST without any type of detailed plan would be viewed similarrily to Jean Chretien's promise to abolish the GST(something much more remembered in Ontario than BC where Chretien was never popular or trusted).
The other issue is that no matter what happens in the referendum only Ottawa can actually eliminate the HST. Now the conventional wisdom is that no one in Ottawa would stand in the way of the will of BC voters and I won't dare to disagree with "conventional wisdom". I will say that the actual text of the agreement between the federal and provincial govt says specifically that HST cannot be removed within the first five years of existence this language exists in all of the agreement the federal govt has signed with HST participating provinces(I happen to note that Flaherty and Harper have never promised to abide by the referendum instead saying that the HST applies in BC on the same "terms and conditions" as other provinces). At very least all the transition money plus quite possibly additional costs born by the Federal govt to implement the HST would have to be paid back in short order as soon as the tax was eliminated. I also note Colin Hansen recently told the Globe and Mail that it would take quite possibly a year or more to get rid the HST after a referendum was held voting it down.
Furthermore my sense of Harper and Flaherty's position on the HST has a lot do with how soon the next election will be and from my perspective there will either be one in the next two or three months well before a referedum or the fall of 2012 long after one. There is another issue and that is how Quebec and their own version of the HST plays into this but that will be for another post.

Ian said...

Ignoring that you failed to link to any study or analysis to prove any of your assertions such as "returning to the PST will see an immediate loss of many retail jobs," the real reasons that a direct switch back to either PST or a value-added PST is that the HST came with hidden deals that no one (especially on the right) wants to talk about.

First was Harper's giant conditional handout from Ottawa to harmonize the taxes (which we'll be screwed out of no matter what if we cancel HST, but good fiscal management would not have tied our province's health to that gift), and second was the massive corporate tax cut that accompanied harmonization - which convinced businesses to lobby hard for it.

Reverse the corporate tax cuts, move to a value-added or old PST (I'm not versed enough to know the pros or cons of either but will agree with you on the need for consumption taxes) and we should be able to get away with a 7-8% PST on top of the GST with all the old exemptions - which may actually spur job creation in restaurants as their prices drop by 7%.

Finally, while the next government (since I doubt the current Liberals want to deal with this anymore) is crafting this bill, they ought to consider mandating that business display the full, after-tax cost of a product as is done in Europe and at gas stations so we can actually know how much we're paying when we see a price on the shelf, online or advertised.