December 9, 2009

HST Income Redistribution

Just days after Ispos-Reid reported overwhelming public disgust with the HST, the federal parliament passed enabling legislation for the tax. Perhaps somewhat late to effectively protest, the B.C. restaurant and foodservice industry chose the same day to launch its campaign against applying the tax to restaurant meals.

When the BC Liberals shocked voters by announcing just two months after the election the harmonized sales tax, they claimed that it would be "revenue neutral". It took until the September 2009 budget update to see what the BC Liberals meant by revenue neutral.

By revenue neutral, the BC Liberals appear to mean that in the first year government expects to receive so much money from the HST that it can pay for $1.1 billion in HST rebates (point of sale, municipalities and housing) and $600 million in income tax changes and still come out with about the same net revenue as it did with the PST.

In response to a freedom of information request I was given a telephone briefing in which I was told that estimates of benefits by industry were derived from the Input-Output tables published by Statistics Canada. Of course that set off a search for the data and my discovery that anyone can get the data used by BC's Ministry of Finance for a payment to Statistics Canada of $165 plus GST. I paid and got the 2006 Input-Output table for BC which provides the distribution of PST by industry and commodity. It is consistent with the government's July 23rd news release which reported:

"It's estimated the HST will remove over $2 billion in costs for B.C. businesses. That includes an estimated $1.9 billion of sales tax removed from business inputs, which enhances competitiveness, increases investment and productivity and, ultimately, increases prosperity. For example, some savings would include about $880 million for the construction industry, $140 million for manufacturing, $210 million for the transportation industry, $140 million for the forestry sector, and $80 million for mining and oil and gas."

The only major discrepancy between that news release and the Input-Output table used to support it is in the benefit claimed for forestry. According to the Statistics Canada data, PST paid by forestry and logging as an input in 2006 was $36 million; forestry might also mean saw mills and pulp and paper mills, but those are part of manufacturing. Nevertheless, the bottom line is the same. The total savings for all industries is $2 billion because they will be able to claim input tax credits after the HST is introduced.

One of the most interesting observations from the Input-Output data is that 41% of the approximately $2 billion in benefits to industry are reaped by construction. In 2006, 40.0% of construction was residential, 48.1% nonresidential and 11.7% repair. It is not obvious how or whether the benefits of the HST tax credit for construction will flow to consumers, but those who purchase construction after July 1, 2010 will not only pay 7% on the inputs previously taxed by the PST but also on other inputs, primarily labour, not previously taxed. That is why home builders have set their hair on fire in opposition to the HST even though construction is the major beneficiary of HST input-tax credits.

The Input-Output data also make it clear why the hospitality industry is upset with the tax. The $10 billion industry paid $48 million in PST in 2006 (less than one half of one percent of its revenue). That means it gets very little by way of input-tax credits, but its customers will pay 7% more on everything they buy after July 1, 2010. That's not just on the occasional big meal out; it's on working people's lunches, coffees and treats. Estimates of price elasticity for restaurant meals support the industry's claim that they will lose 7% or more of their business as a result of the HST.

Even if claims by supporters of the HST are true with respect to price reductions from industries that benefit from input-credits, a price reduction (before the 12% tax is applied) in the cost of my neighbour doing a renovation isn't going to help me pay the increased cost for my coffee and newspaper. The change will make the underground economy in construction even more attractive and expose those who use it to rip-offs and liability. There are winners and losers with the proposed change from the PST to the HST; those who lose vastly outnumber those who win and the public opinion polls demonstrate that people understand that.

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(For those who are interested in Input-Output tables, see the PowerPoint presentation at https://ozone.scholarsportal.info/bitstream/1873/150/1/Input-Output.PPT.)