Why I’m voting against the HST: It fails the test of fairness

May 26, 2011

Reluctantly (and pending significant reforms in the next few weeks), I’ll be voting against the HST this June. It’s a difficult decision (and indeed some associated with my organization have landed on the other side of this question).

I come to my position reluctantly because: a) I do not relish joining anti-tax campaigns (they tap into a current in political culture that ill serves us in the long term); and b) I accept the arguments that a value-added sales tax such as the HST is more economically efficient than the old PST.

That said, the economic benefits of the HST have been grossly overstated by its proponents. Many of the businesses that will most benefit from the HST (particularly in the resource sector) are much more sensitive to demand-side considerations (namely the global market for their products) than to supply-side considerations (such as taxes) when making their investment decisions.

These caveats notwithstanding, there are core design flaws in the HST that mean the tax as currently structured is simply unfair, and exacerbates trends that have undermined the overall progressivity of BC’s tax system for the past decade. Those trends are two-fold:

  • A shift in government revenues from corporations to households; and
  • At the household level, a shift from progressive income taxes to regressive consumption taxes, such that upper-income households have seen a much larger drop in their taxes.

From the time the HST was introduced, CCPA economists have provided nuanced analysis highlighting key flaws, but showing how these can be fixed. Their recommendations, however, have thus far been ignored. The government has stubbornly refused to fix what is broken. And in the absence of a willingness to redress these defects, I am resigned to voting against the tax.

Now comes word that Premier Clark intends to make a “bold” change to the HST before the referendum ballots are mailed. If the government surprises us before the vote and does indeed propose reforms that would benefit families struggling to make ends meet, I’ll reconsider (but I’m not holding my breath).

When comparing the overall corporate tax regime in BC to other jurisdictions, there is simply no compelling case that the corporate sector in BC was in need of a massive tax reduction (the HST system, by providing rebates for taxes paid on inputs, bestows upon businesses a tax cut of somewhere between $730 million and $2 billion). As it is, corporate tax rates has been dropping for years, and global accounting firm KMPG consistently finds BC to be one of the least expensive places in which to do business in the industrialized world. I’m sure many businesses appreciated the tax cut, but there is no evidence they needed it.

At the household level, British Columbian consumers will be paying more (about $1.3 billion more, according to the recent report of the government-appointed HST panel). Fundamentally, the HST and its low-income credit, as currently structured, fail the equity test. The credit largely off-sets the higher HST costs for the poorest British Columbians, but its early and quick phase-out means that many modest and middle income households will be facing higher costs.

It is possible, however, to envision a reformed HST regime that I would be happy to support; changes that would see BC realize the economic and efficiency benefits of the HST, while adequately addressing and offsetting the equity impacts of this shift from the PST to the HST.

Some have proposed doing this by simply lowering the HST by one percentage point. That would be ill advised; it would be expensive (about $800 million), and would provide a large benefit to many upper-income households that are not in need of such a reduction.

A much better approach would be to restructure the HST credit, along the lines of the Canada Child Tax Benefit or Old Age Security, such that the phase-out is much more gradual. This more generous credit could be paid for by an increase in the general corporate income tax rate (equivalent to what the corporate sector is saving due to the HST). Such an approach would not impact most of the smaller service-sector businesses that have been harmed by the HST (as they are subject to the much lower small-business corporate income tax rate).

Ultimately, it is unfortunate that we will be voting on a terribly narrow referendum question that will produce no particularly positive outcome either way. As a province, we would be much better served by a Fair Tax Commission, in which we put the entire BC tax and royalty regime on the table. British Columbians deserve a chance to thoughtfully deliberate on all the options, and to determine together how we want to raise the revenues we need to meet our social, environmental and economic goals.

Seth Klein is the BC Director of the Canadian Centre for Policy Alternatives.