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.
Post a Comment