Less than three months after the provincial election, some small-business owners and consumers are feeling like they’ve been sucker-punched by the B.C. Liberal government. It’s all because Premier Gordon Campbell and Finance Minister Colin Hansen declared in late July that the seven-percent provincial sales tax will be combined with the five-percent federal goods-and-services tax, effective July 1, 2010. The new 12-percent harmonized sales tax—known as the HST—will be extended to a broad range of goods and services previously covered by the GST but not the PST. This includes new homes, restaurant meals, and environmentally friendly products such as bicycles, hybrid cars, and green building materials.

Consumers will also pay an extra seven percent every time they attend a movie, a concert, or a theatre performance. If they take a taxi to the show, they’ll have to fork over another seven percent. The HST will also apply to phone, electricity, and cable bills. And that’s not all. Vehicle owners will pay an additional seven percent on any service charges, such as for changing the oil or fixing a flat tire. Accountants, engineers, architects, tradespeople, aestheticians, and acupuncturists—to name just a few occupations—will also charge an extra seven percent. In addition, there will be a new seven-percent tax applied to club memberships, haircuts, and countless other services.

At Rattée Hairstyling for Men near Burrard Street and Broadway, owner James Rattée isn’t thrilled with the news. “I think it’s pretty unfair all of a sudden to stick a 12-percent tax on a haircut,” he told the Georgia Straight. “It just doesn’t make sense.”

Rattée added that he’s not opposed to government taxation but he doesn’t feel that the B.C. Liberals were transparent. “We had no discussion,” he said. “And all of a sudden, government tells us that’s the way it has to be.”

Simon Coutts, the owner of Simon’s Bike Shop on Robson Street, echoed Rattée’s concerns. In a phone interview with the Straight, the blunt-speaking merchant noted that bicycles and bicycle repairs have always been exempted from provincial sales tax. He said he wonders what this means for helmets, lights, and bright vests, all of which reduce a cyclist’s chances of being killed. Coutts is suffering a double whammy, because he’s also a part-time real-estate agent. Any home sales he negotiates will include a 12-percent tax rather than the five-percent GST.

“It’s just one big cash grab,” he grumbled. “In this type of economy, people are struggling.”

Coutts predicted that the B.C. Liberals will be tossed out of power if they introduce the HST. “There will be a groundswell, a coup, against them for putting in the harmonized sales tax,” Coutts said. “It’s not good for anyone’s business.”

The Campbell government has claimed that the HST will be revenue-neutral and will spur business investment, enhance productivity, and make B.C. companies more competitive internationally. Currently, companies collect refunds for any GST paid in connection with the cost of operating a business. But businesses can’t claim credits for provincial sales taxes on such things as machinery, office supplies, and computer software. However, under the HST, companies will claim credits for all consumption taxes for “business inputs”. According to the Ministry of Finance, this will save businesses operating in B.C. approximately $2 billion per year.

NDP finance critic Bruce Ralston told the Straight in a phone interview that the HST is a “fundamental shift of the tax burden from business to consumers”. He cited a 2008 C.D. Howe Institute study, which suggested that between 2010 and 2012, the B.C. government would collect an additional $4 billion in consumption taxes under the HST. He wryly stated that the Toronto think tank’s calculation was not revenue-neutral at all, adding that his party plans to vote against the HST.

“Despite the flatulent, overblown rhetoric of Gordon Campbell that this is the single best thing that could be done to stimulate the economy, I think it’s clear from industry concerns—the restaurant industry—that it will have a dampening effect on consumers’ willingness to spend,” Ralston said.

Not everyone agrees with Ralston. Maureen Bader, the provincial director of the Canadian Taxpayers Federation, told the Straight by phone that the HST will make the tax system simpler. She said that after this measure was introduced in some Atlantic provinces in 1997, business investment rose. “There will be a short-term price increase for consumers,” Bader acknowledged. “So the Canadian Taxpayers Federation is suggesting an increase in the basic personal exemption on income tax. But over the long term, prices should go down to consumers as businesses, in a competitive environment, lower their prices.”

Another supporter, SFU economist Jon Kesselman, told the Straight in a phone interview that the reform is “long overdue”. He noted that increased business investment can lead to more employment and higher wages for workers. And although it appears that the HST will shift the tax burden from businesses to the public, he claimed that this isn’t an “accurate depiction”, because companies will reduce prices as their tax burden falls.

“If everything is taxed at the same rate, it doesn’t bias people’s choices between doing one thing versus another,” Kesselman said. “And to collect the same revenue and give businesses the input credits—which are really needed for better efficiency in the economy and more investments—you do need to tax a broader range of consumer goods.”

Hansen and federal finance minister Jim Flaherty signed an agreement last month stipulating that B.C. won’t collect a seven-percent tax on “motive fuels, children’s clothing and footwear, children’s car seats, feminine-hygiene products, and books”. As part of the deal, the B.C. government will receive $1.6 billion from Ottawa to cover transition costs. The province cannot create exemptions for any more than five percent of B.C.’s estimated GST base, which, according to the NDP, will restrict exemptions primarily to the purchase of fossil fuels.

The government has announced a five-percent rebate on new housing up to a purchase price of $400,000. This means a maximum rebate of $20,000. The Ministry of Finance has claimed there is already an “embedded” provincial sales tax of two percent on new homes, which will no longer be embedded under the HST. Publishers, on the other hand, will likely lose a provincial exemption on paying tax on purchases of newsprint and other paper.

Meanwhile, the HST won’t apply to goods and services not covered by the GST, including prescribed medicines and diagnostic services, many health services, and nearly all food in grocery stores. This gives a competitive advantage to grocery owners—including Jimmy Pattison—over restaurant owners. Not surprisingly, the British Columbia Restaurant & Foodservices Association has urged its members to write letters to the minister of finance.

In a recent phone interview with the Straight, BCRFA president and CEO Ian Tostenson said that restaurant-industry sales fell between seven and 10 percent after the federal government introduced the GST in 1991. “Prior to the GST coming in, restaurants had about 50 percent of the share of the food market relative to grocery stores, and that dropped down to about 39 percent,” he said. “It has never really recovered.”

Tostenson predicted that the HST will have a similar impact on B.C.’s $10-billion food-and-beverage industry, which has been battered by an economic slowdown. He described a 12-percent tax on restaurant meals as a “negative psychological block” for consumers, who will reduce tips to servers. “We also see an effect on employment,” he said. “Restaurants just won’t be hiring.”

Prior to the May 12 election, the Canadian Restaurant and Foodservices Association asked the B.C. Liberals and the NDP if they opposed harmonizing the GST and provincial sales tax. Here is part of the B.C. Liberals’ response: “The harmonized GST would make it harder for future provincial governments to lower or raise sales tax rates, which reduces flexibility. In short, a harmonized GST is not something that is contemplated in the B.C. Liberal platform, but we are committed to improving the tax system.” The NDP stated that it would not harmonize the GST and PST.

Tostenson said the finance minister appears to want to mitigate damage caused by the HST. He noted that the provincial liquor tax was recently lowered from 10 percent to seven percent, but he claimed that this won’t offset the HST’s negative impact. “I think the industry is clearly saying to us, ”˜Nothing short of removal of the tax is going to work,’ ” Tostenson said. “What we’ve seen now, this isn’t so much a resturant problem. It’s a consumer problem. They’re not going to go to restaurants. The consumers have to get very engaged and demand some answers from government.”

The BCRFA and Tostenson personally supported the B.C. Liberals during the recent election campaign when the party announced that it wouldn’t increase the minimum wage, unlike the NDP. Tostenson said that members of his association had no idea that they would face a 12-percent restaurant tax after the election from the B.C. Liberals.

“In the words of a restaurant operator—a very well-known restaurant operator—the minimum-wage issue is nothing compared to this,” Tostenson said. “There is a real sense of disappointment.”

Former NDP MLA David Schreck, a health economist, has compared the BCRFA’s response to the government to “a beating with a wet noodle”. On his Web site Schreck wrote that the real test of the association’s resolve will be if it moves its on-line petition to the front counter of every restaurant in the province. “That is what it would take to get noticed,” Schreck stated, “but it is doubtful whether the Restaurant Association has the political will to thump the nose of the Campbell government that hard.”

Even though the HST has been praised by economists such as Kesselman, Campbell and Hansen face a growing backlash from others. Communications consultant and 24 hours newspaper columnist Bill Tieleman has started a Facebook group, and former Social Credit premier Bill Vander Zalm has promised to do what he can to help axe the HST.

There was a rally against the HST on the B.C. Day weekend in Burnaby attended by NDP MLAs. The Opposition party has also created an on-line petition calling on the Campbell government to scrap plans to introduce the HST in 2010.

The Straight visited Hansen at the B.C. government’s Vancouver cabinet office on July 31—the same day that Vander Zalm appeared on the front page of the Province newspaper holding a red “Stop” sign. Hansen said the $1.6-billion federal payment was not the reason why his government is harmonizing federal and provincial sales taxes, although he acknowledged that this would come in “very, very handy” in dealing with some fiscal challenges.

Listen to the complete interview with B.C. Minister of Finance Colin Hansen.

“The provincial government revenues are dependent on a strong provincial economy,” Hansen said. “What we have been told by numerous studies and economists is that the single biggest initiative we could do to stimulate the B.C. economy going forward is to adopt the HST.”

The finance minister acknowledged that the restaurant industry has legitimate concerns, but claimed that it was “exaggerating” its case against the HST. Hansen repeatedly stated that the elimination of an “embedded PST” will give an enormous boost to businesses, including restaurants. He said that every time a company buys a chair, for example, it’s stuck paying a seven-percent provincial sales tax. That will change under the HST because businesses will claim credits for these inputs. And he claimed that this will lead to lower prices.

“I know people are skeptical,” Hansen said. “They’ll say, ”˜Well, you know, how do you know it’s being passed on to the consumer?’ The studies that have been done about the introduction of HST demonstrate that.”

A 2007 study by University of Toronto economist Michael Smart for the C. D. Howe Institute demonstrated that selected consumer prices, as measured by the Consumer Price Index, fell by 0.3 percent more in three Atlantic provinces that adopted the HST after 1997 when compared with the same prices in provinces that maintained retail sales taxes. The largest decrease, at 3.2 percent, was for alcohol and tobacco products. The greatest increase, at 1.5 percent, was for clothing and footwear, followed by 1.4 percent for shelter.

“Since expenditure shares for these categories tend to be larger for low-income households, this suggests that the reform was regressive in that it raised average prices for low-income households while lowering prices overall,” Smart wrote. The B.C. government has promised that a refundable B.C. income-tax credit will be paid with the current GST credit to offset the HST’s impact on low-income residents.

Smart’s study also noted a significant annual increase in business investment in machinery and equipment in the harmonizing provinces compared with those that retained retail sales taxes. The increase in relative business investment was transitory, Smart reported, though it resulted in a permanent increase in the capital stock of the province.

Hansen maintained that the province needed to take action in response to the introduction of the HST in Ontario. Otherwise, he suggested, B.C. risked losing capital investment. He claimed that finance-ministry officials were looking at the HST during the “interregnum”—the election period—and he didn’t get involved in the issue until after May 12. By that time, Hansen said that it became obvious to him that the ground had shifted significantly. That’s when he started studying the implications of Ontario’s decision on the B.C. economy.

“When we started looking seriously at this at the end of March—sorry, at the end of May—I spent a fair amount of time on-line,” Hansen said.

Ralston said he doesn’t believe it. The NDP finance critic said that Ontario premier Dalton McGuinty announced the HST on January 29, and it was included in the March 26 Ontario budget. The B.C. election period began on April 12 with the dissolution of the legislature.

“It’s clear they knew about it well before the election call,” Ralston claimed. “And if he [Hansen] is to be believed on his importance of the comparability to Ontario, they obviously were thinking about it well before the election.”

Ralston noted that the B.C. Liberals told the restaurant industry before the election that they had no plans to harmonize the tax, which he characterized as a “completely and totally false” statement.

The Straight asked Hansen for his response to anyone who might believe that B.C. Liberals had a secret agenda before the election to impose the HST to balance the budget—and that he chose not to tell the public during the election campaign. “I would say, ”˜That is absolutely untrue,’ ” Hansen replied.

There has been talk of recalling B.C. Liberal MLAs because of the HST. Ralston, however, said this can’t be initiated under recall legislation until at least 18 months after the election.

This means it will take quite some time—possibly not until the May 2013 provincial election—before the public can render its verdict.

With files from Matthew Burrows and Carlito Pablo.