Serious BC Government Damage Control...the HST backlash

Heard MLA Kevin Krueger on Radio NL yesterday. He was explaining the provincial government's decision to close Tourism BC. This was a fast decision, with no consultation with stakeholders. But, Kevin got off easy on this particular issue.

The big deal right now is the backlash against the government instituting the Harmonized Sales Tax. It seems this has now put the BC Libs into full damage control. The Premier on Global BC defending the decision. And, an email today from Finance Minister sent to the BC Liberal email list. Here it is, in long glorious detail:

Why the HST and why now?

Dear friends,

I know many of you have questions about how the Harmonized Sales Tax (HST) works and why our government made the decisions it did. I would like to address some of the questions I have been receiving from you.

The leading economists and think tanks tell us that the introduction of the HST is the single biggest thing we can do to improve our economy by making our businesses more competitive and encouraging billions in new investment. This will result in higher productivity, higher wages and lower consumer costs.

We were elected with a clear mandate to build a strong economy for British Columbians. This decision, while sudden and controversial, helps accomplish that.

Question: What is the HST and why is it a good thing?

Today, provincial sales tax (PST) is applied at every step in supplying a good or a service that helps you in your daily living. That means that you are paying an embedded PST whether you are buying a head of lettuce or whether you are shopping at the lumber yard for 2X4s to build a new fence.

For example, a trucking company that moves that head of lettuce or those 2X4s to the store pays PST on equipment it uses to run that business. So when that company buys new tires for its fleet of trucks they are charged PST. Those costs are added to the final price of the lettuce or 2X4s. So when you, the consumer, purchase the 2X4s at a lumber yard or lettuce at a restaurant you are actually paying a hidden, embedded cost of the PST that the trucking company must recover. That, of course, is on top of the 7 per cent PST you pay on the final product.

Remember, that embedded PST is actually charged through the entire life of that 2X4, from the energy costs used to power a sawmill to the trucker who paid PST on parts to maintain his vehicle. Under a value-added tax system (VAT) – such as what we are moving towards with the HST – companies are refunded the PST on items they buy to carry on their business.

There is an estimated $1.9 billion of PST per year that is embedded in the cost of goods and services before they reach the consumer. With a value-added tax system (VAT) goods become less expensive to produce, and those savings are passed on to consumers. For example, when the three Atlantic Provinces adopted a HST, consumer prices fell, according to a 2007 study by University of Toronto professor Michael Smart.

The Harmonized Sales Tax (HST) is more commonly known globally as a “value-added tax” (VAT) and Canada is one of the last countries in the world to fully adopt a VAT system. Over 130 countries already have shifted to a VAT system including 29 of 30 OECD countries. Countries that have not embraced a VAT tax system have been shown to have higher prices (before VAT) at the domestic consumer level and higher prices at the export level.

In B.C., the biggest driver of our standard of living is our export markets. There is no other measure that would make our export markets more competitive and, as a result, create jobs in B.C., than our move to the same kind of VAT system that other countries have already embraced. 

Finally, the existing PST is a major burden on new investment. By implementing the HST, British Columbia will lower the tax on new investments by over 40 per cent, thereby lowering the burden on investment to slightly below the national average. Economic experts have repeatedly told us that we must address our lagging levels of productivity. This is the most important measure we can take to address that issue, which will make our companies more competitive and allow them to create more jobs.

Question: Why is it so urgent that B.C. move to an HST today?

Since the late 1990s, both federal Liberal and Conservative governments have been pushing provinces to join the HST system adopted by Nova Scotia, New Brunswick, and Newfoundland in 1997. Quebec had already set up a comparable value-added tax system a few years earlier.

In late May, in view of Ontario’s decision adopt the HST, B.C. had to re-evaluate its previous opposition to signing on to the HST.  Experts were quick to point out British Columbia’s economy was facing a new and significant economic disadvantage at a time when the global economy would be expected to be heading into recovery mode.

We had to ask ourselves the hard question: Was British Columbia a jurisdiction that wanted to compete to attract investment and job-creation through lower costs and higher productivity? If the answer was YES then implementing the HST was the most direct and most effective way to do that. 

Current estimates are that the HST will allow our job-creating industries to avoid passing onto consumers an estimated $1.9 billion annually in embedded costs.

In the construction sector there is $880 million that they will not have to build into the prices that consumers will ultimately have to pay.

In manufacturing, it’s $140 million – that means that our export industries will be more competitive when they are trying to compete with products from the other 130 countries that already have a VAT system.

In transportation, it’s $210 million – that means that every product, from lettuce to paper, will be less expensive that it otherwise would have been.

In the forestry sector it will save $140 million – which means that when it comes to selling to countries like China or Japan, we can be more competitive in competing with the Scandinavian countries which have had a VAT system for many years.

Mining and oil and gas will save $80 million, which will put us on a level playing field with Alberta.

These industries are the cornerstone of job creation in every region of our province. These savings are vitally important in ensuring that our companies can maintain their competitiveness and hire more British Columbians. It’s important to remember that when our resource industries are strong they support our other community industries such as retail and the service sector.

By moving to a single tax system we eliminate $150 million a year in compliance costs placed on every business to administer two parallel tax systems. Government itself will save $30 million in reduced compliance costs, which will go directly back into programs for families.

The $1.6 billion contribution from the federal government will go a long way to help protect the core health, education and social services people depend on while we still maintain the lowest personal, small business and corporate taxes in Canada.

Question: But doesn’t this mean more taxes for the average consumer?

There is no denying that in some cases HST will apply where previously the PST did not. But the long term benefits of lower consumer prices and higher wages will far outweigh those impacts.

To help low-income British Columbians, a B.C. HST Credit of $230 will go to individuals with incomes up to $20,000 and family members with incomes up to $25,000 to offset the impact of the HST. That benefits over 1.1 million British Columbians.

The Province is implementing a point-of-sale rebate on a number of products. These include:

• gasoline or diesel
• marine diesel or aviation fuel including biofuels
• components used in a motor vehicle, boat or aircraft
• books
• children’s-sized clothing and footwear
• children’s car seats and car booster seats
• diapers and feminine hygiene products
• all existing GST exemptions will continue to apply (i.e.; basic groceries)
  

We will offset the incremental cost of the HST on new homes by providing an HST rebate for new homes to a maximum rebate of $20,000. That means taxes remain essentially unchanged for new homes valued up to $400,000. It’s important to note that the HST only applies to new homes.  There is no HST on previously-owned homes being re-sold.

There will also be rebates on the incremental cost of the HST for municipalities, charities and eligible non-profit organizations.

Question: Is this just another tax grab?

No. The revenue generated from the HST will be about the same as the revenue projected from the current PST system.

This shift from PST to HST will not be any kind of a “windfall” of revenue to the Provincial coffers. The $1.6 billion in one-time money that the federal government will transfer to us will help fund needed health care and education programs as we deal with the collapse of our provincial government revenues. Aside from that, the PST revenues and the HST revenues are about the same.

Question: Who supports the HST?

First of all, most leading Canadian economists and think-tank organizations support this move.
In addition, numerous provincial organizations have come forward voicing their support for this change, including:

• The B.C. Business Council
• The B.C. Progress Board
• The B.C. Chamber of Commerce
• The Retail Council of Canada
• The Chartered Accountants of British Columbia
• The Canadian Manufacturers and Exporters
• The Council of Forest Industries
• The Mining Association of British Columbia
• The BC Trucking Association
• The BC Roadbuilders Association
• The Motion Picture Production Industry Association of British Columbia

These are more than just organizations – they represent hundreds of companies and employers who recognize that this is the single biggest thing we can do to enhance their competitiveness, allowing them to protect and grow jobs and wages in our communities – many of which are in rural British Columbia. Virtually every independent economist supports a move to HST.

Question: Why was this decision so sudden and such a surprise?

Every year for the past eight years, we have looked at the question of HST as part of the pre-budget review of all tax matters. Each year, we have come to the conclusion that, on balance, it was not in the interest of British Columbia. There were a couple of reasons for that. First of all, only three Canadian provinces (Nova Scotia, New Brunswick, Newfoundland) had adopted the HST system. (Quebec had adopted its own parallel VAT system in the early 1990s).

Secondly, there was little flexibility permitted for the tax rate in the federal model. We would have had to join the system with a 13 per cent rate as opposed to the 12 per cent we propose today. Furthermore, no exemptions were permitted.

The Ontario announcement changed everything.

While we knew, as of March 26th that Ontario was adopting the HST, our ability to assess the impact of that only came after the election. As we re-engaged with B.C. Finance officials after the election, it became quickly evident that the HST world had changed significantly.

With Ontario signing onto HST as of July 1, 2010, we quickly had to make decisions to ensure that B.C. would not be left at a competitive disadvantage. As we started discussions with the federal government in late May, they told us that we had to decide by the middle of July if we were going to get on the same July 2010 timeline that Ontario was on.

Question: Why didn’t we talk about this during the election?

It just wasn’t on our radar. As part of the previous budget process (as in every year prior), the Ministry of Finance had looked at the pros and cons of adopting the HST. As was the case in each of the previous years, the disadvantages outweighed the advantages. In the planning for the 2009 budget, like previous years, the decision was that HST did not make sense for B.C. given the inflexibility of the federal government and the fact that the only provinces to adopt a VAT system were east of Ontario.

During the election, the BC Liberal Party received dozens of "surveys" asking about the BC Liberal platform. In a couple of the surveys, the party was asked about the HST. The answer was that the party's platform, while aware of the benefits the HST offered, did not contemplate the adoption of the HST in B.C.

But circumstances changed after the election when we were once again able to engage with experts in the Ministry of Finance and were made aware of the full impact of Ontario’s actions and the new flexibilities provided by the federal government. We had to move fast if we were not to be left at a competitive disadvantage to Ontario.

Should we believe what the NDP are saying?

Absolutely not. While the NDP claim to support job-creating resource industries such as forestry and mining, their opposition to this would cost us investments and jobs that support both our rural and urban communities. They are using the HST for their own short-term political gain and failing to look at the long-term interests of our province. Their approach would take away $2 billion in savings to our employers and would ultimately cost us jobs.

They are also saying no to the $1.6 billion in transition funding from the federal government and $30 million in annual savings to taxpayers. That is money that can be used for important services such as health care and education. The NDP are willing to sacrifice that for short-term political gain. And while they claim to care about the deficit, they are willing to reject that money and add to the deficit burden on our children.

Remember, this is the same NDP who added billions of dollars in new taxes during the 1990s and have voted against more than 120 tax cuts since 2001.

In Conclusion:

Remember: The BC Liberals were elected to do what was right for our economy and job creation. The economy was the single biggest issue in the election campaign. Economists around the world say this is the single most important thing we can do to attract investment and create jobs. While it’s not popular, it is the right policy for our economy and in the long-term we will see those benefits. If we fail to act we will lose investment and job opportunities not only to other provinces but to other countries.

Remember: With the shift to the HST system, B.C. will still have the second lowest taxes of any province (and we are only marginally above Alberta). That includes the lowest personal income taxes in Canada for incomes up to $116,000, and the second lowest small business and corporate income taxes (soon to be THE lowest).

Remember: On top of lower prices, there are numerous products from gas to books to children’s clothing that are exempted from the PST portion of HST. New homeowners will get up to $20,000 in rebates. And low-income families will get up to $230 per person in additional tax credits that come via a cheque in the mail every three months.

Thank you for taking the time to read though some of the reasons why I think this adoption of HST is in the best interests of British Columbia.

Sincerely,

Colin Hansen
Minister of Finance

P.S.: Noted BC Economist, Jock Finlayson and his colleague, Ken Peacock, wrote one of the best explanations of the benefits of HST recently: http://www.bcbc.com/Documents/PR_20090728_BA_HST.pdf

Authorized By Jim Pipe, Financial Agent BC Liberal Party.

Comments

[Darry Mc Gaw]

THE HST SONG

Hi folks.

"The HST Song" is a spoof on the Harmonized Sales Tax sung in the same fashion as The MTA Song done by The Kingston Trio a hundred years ago (or does it just seem that long). Both songs are about an over-taxed populace with a preposterous result.

I thought you might like it.

Cheers,
Darry Mc Gaw
778-839-8738

Click here for The HST Song: http://www.funny-email-for-everyone.com/hst-song.html