August 19, 2009

Restaurants Could Kill the BC HST

On July 1, 2009, France reduced its value added tax (VAT - the equivalent of our GST or HST) on restaurant meals from 18.5% to 5.5%. The tax cut is expected to create 40,000 jobs. Meanwhile in BC, effective July 1, 2010, the Campbell government is increasing the tax on restaurant meals from 5.0% to 12.0%. Guess what will happen to restaurant jobs in BC!

Ian Tostenson, President and CEO of the British Columbia Restaurant & Foodservices Association, was quoted in the Times Colonist and elsewhere saying that the HST could cause the restaurant industry to lose over $500 million. Unfortunately for restaurant owners, workers and customers the cost to the restaurant industry is likely to be over $1 billion.

Statistics Canada produces monthly reports on food services and drinking places. Dividing monthly sales for the industry in each province by the population of each province yields the graph shown here. BC and Alberta have average monthly per person food service and drinking establishment sales that are 33% higher than the average in the other provinces. BC, Alberta and Saskatchewan are the only provinces not to levy a provincial sales tax or HST on restaurants.

In May in BC, on a seasonally adjusted basis, total sales for food services and drinking places was $638 million. On an annual basis, the industry brings in almost $8 billion. Alcoholic beverages are taxed at 10% but food attracts only the 5% GST. Sales in drinking places are not reported by province, but on a national level they represent only 5.2% of the industry total. It is reasonable to assume that of the $8 billion in annual provincial food services and drinking places receipts, over $7 billion is at risk of being taxed at the 12% HST rate.

It doesn't take a course in economics to understand that the higher the price of something, the less will be bought. Economists use the term "price elasticity of demand" to describe the percentage change in quantity demanded when the price increases by one percent. Restaurant meals are frequently used in economic textbooks and exams when discussing the concept of price elasticity. "Price Elasticity: From Tires to Toothpicks" on EconEdLink discusses the examples of the price elasticity of gasoline and of restaurant meals. The Campbell government apparently missed this lesson. It shows the price elasticity of gasoline as -0.2 and the elasticity of restaurant meals as -2.3 (other sources consistently put the price elasticity of restaurant meals between -1.8 and -2.3). This means that a one percent increase in the price of gasoline, produces only a 0.2 percent drop in demand. That is why the carbon tax is inefficient and ineffective in reducing emissions. It also means that a 7% increase in restaurant meals will produce a 16% drop in purchases at restaurants. Unless restaurants respond by lowering prices, some going bankrupt in the process, Campbell's HST could cost the restaurant industry over $1.1 billion in lost business.

As it pleads poverty, the Campbell government is not going to be able to compensate the restaurant industry for its lost business. That is why the BC industry might be tempted to join in the referendum campaign to stop the BC HST. There have been six initiative applications under the B.C. Initiative process (a referendum that is citizen initiated); none have collected sufficient signatures to require a vote (10% of the registered voters in each of the province's 85 constituencies). Imagine what would happen if most restaurants and drinking establishments in the province had the required signature forms at their front desks! The Initiative process requires that the necessary signatures be collected within 90 days. With a signature form in virtually every restaurant and bar the necessary number of signatures might be gathered within days, just like Bill Tieleman has succeeded in getting over 100,000 members joining his NO BC HST facebook group. Before the 2010 games, British Columbians could be voting to get rid of Campbell's hated services tax.