By Jock Finlayson

To a visiting policy analyst from almost any other advanced economy, the near-hysterical criticism being levelled at B.C.’s proposed harmonized sales tax would seem strange indeed. Most prosperous jurisdictions around the world have long since adopted integrated value-added sales taxes that closely mirror the HST, which consists of the existing five-percent federal goods and services tax along with a seven-percent provincial tax that will be applied to a similar tax base. In Canada, Ontario is implementing its own HST next month, while Nova Scotia, New Brunswick, Newfoundland, and Quebec did so in the late 1990s—with no evident harm to their economies.

There are several reasons why the HST is smart tax policy. Most significantly, it removes all current provincial sales tax from “inputs”—the goods and services that companies in B.C. must purchase in order to carry out their own business. While the PST is often viewed as a consumption tax, the reality is that it applies to elements of both consumption and production.

Approximately 40 percent of PST revenue collected by Victoria is paid by businesses on an array of inputs used in producing goods and services—everything from computers, equipment, vehicles, office supplies, furniture, and fixtures to legal services, purchased energy, and construction materials. These input taxes represent additional costs for B.C. businesses in the range of $2 billion annually. Taxing business inputs raises the cost of capital, penalizes exports, and favours some sectors over others because firms rely on purchased inputs to varying degrees. Under the HST, the provincial sales tax on inputs is removed, as the seven-percent provincial portion will be credited along with the five-percent GST for most goods and services that B.C. firms use to carry out their business operations.

Experience in Atlantic Canada confirms that shifting to a value-added sales tax like the HST paves the way for a sizable jump in business investment. University of Toronto economics professor Michael Smart found that investment in machinery and equipment rose 12 percent above trend levels in the years following the 1997 sales-tax reform. There is good reason to anticipate similar gains in B.C., where capital investment per worker has long lagged the national average. Over time, higher investment will lead to stronger economic growth, increased productivity, more exports, and higher wages for private sector workers.

Another benefit of harmonization is lower compliance costs and greater administrative simplicity. Under the present system of bureaucratically unconnected B.C. and federal sales taxes, businesses have to remit separately to the federal and provincial governments and ensure they are in compliance with two sets of tax rules (including a litany of exemptions in the case of the PST). Administrative and other compliance costs will be far lower once the HST is implemented.

Shifting from a retail to a value-added sales tax means the tax base is broadened so that some items—especially services—now exempt from the PST (but that are covered by the GST) become subject to the combined 12-percent HST. Consumers will pay additional tax on items not currently subject to PST. However, for about 80 percent of total consumer spending there will be no increase in taxes—these items are already subject to the PST or else are HST-exempt.

But contrary to what many believe, the net result is not to raise the tax-inclusive cost of these items to the final consumer by seven percent. The reason is that the prices of most goods and services sold in the B.C. market will fall as the costs imposed on businesses by the PST disappear. Experience in Quebec and the Atlantic provinces confirms that the reduced sales tax on business inputs was passed on to consumers in the form of lower (pre-tax) prices. This outcome is not surprising in a competitive marketplace.

B.C.’s restaurant industry is worried that the HST will dampen business as consumers are charged 12 percent on restaurant meals, versus the five percent GST today. At the margin, there is likely to be a (small) reallocation of the household “food dollar” away from restaurants and toward home-prepared meals. Nationally, restaurant sales did drop when the GST was introduced in 1991, but they quickly rebounded. Between 1991 and 1997, per capita restaurant sales in Canada rose by one-quarter.

Consumption taxes are sometimes criticized for being “regressive” by disproportionately affecting lower income households. To address this concern, the provincial government intends on providing a refundable HST credit which will be paid quarterly, along with the existing GST credit and carbon tax credit, to lower income individuals. Instead of squabbling over the principle of the HST, the NDP might usefully probe whether a more generous HST tax credit is warranted.

Jock Finlayson is the executive vice president of the Business Council of British Columbia.