Backlash grows over new B.C. Liberal harmonized sales tax
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.”
On July 31, Minister of Finance Colin Hansen explained the implications of the harmonized sales tax for British Columbians. Interview by Charlie Smith for the Georgia Straight.
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.