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May 25, 2011

Clark Risks Credibility on HST Fix

Has Premier Christy Clark turned the HST referendum into a vote of confidence in her government?

She had a choice; she could have remained neutral and said her government would abide by the will of the voters on the HST. She chose to advocate for the tax, throwing a desperate “Hail Mary” pass in a last minute attempt to “fix” the tax. The government newsroom includes a video of Clark making her pitch to vote for the HST. The Clark proposal came so late that the household mailer explaining the referendum cannot be updated, but don’t worry, your tax dollars will carry the government’s message to you through TV, radio and newspaper ads.

Can you trust Clark’s promises? Turning the vote into a confidence question on Clark would be ironic since pro-HST advocates are promoting a YouTube video with the message that voters should vote on the tax, not what they think about Gordon Campbell. Instead of playing it safe, Clark has put it “all in” in an attempt to rescue an unpopular tax. Critics point to the BC Liberal record on broken HEU contracts, the sale of BC Rail, broken teacher contracts on class size and composition, the HST and corporate tax cuts which followed the 2001, 2005 and 2009 elections with no mention of those cuts during the election. They ask if Clark can suddenly announce an increase in business taxes, what might she do after an election with respect to the HST rate? Would unexpected economic events be used as justification for a change in plans? That is why the referendum could become a vote on whether she can be trusted rather than on the merits of the tax.

Clark’s proposed “fix” to the HST deserves serious analysis. At first glance a reduction from 12% to 10% plus one-time cheques for some families looks good. As usual, the devil is in the details. Finance Minister Kevin Falcon answered a question on the May 25th Global noon news saying the government will try to get the cheques out before the end of the year if the HST is approved in the referendum. Past attempts to bribe voters with their own money have met with mixed results. The proposed one-time payment should be ignored as little more than an attempt to sway voters. The lasting change would be a reduction in the provincial portion of the HST rate to 6% on July 1, 2012, and to 5% on July 1, 2014. The government describes that as a reduction in the HST rate to 10% by 2014, but they have no control over the federal portion.

Finance Minister Kevin Falcon was quick to portray the choice before voters as a 10% HST or a 12% combined PST and GST, but that is far from true. The tax “base” is the total value of goods and services from which the tax is taken. Like the GST, the HST applies to most services and many previously PST exempt goods. If you can believe what pro-HST advocates and the government say, there are about 20% more things that the HST applies to than the PST, so a 7% PST on 0.8 of the HST base is actually a 5.6% tax. That makes the proposed reduction by 2014 and the replacement of the HST with the PST/GST fairly close. It is very unfortunate that no reliable statistics are available to independently verify the relative size of the BC HST and PST tax bases. I wrote several columns on this after the tax was announced in 2009 and I submitted freedom of information requests, but the issue remains unresolved.

I have argued that the cost of the HST is closer to $350 per person than $350 per family but if we suspend disbelief and use the government’s figures, it claims that its proposed July 1, 2012 HST provincial rate reduction to 6% would result in the cost to an average family being reduced from $350 per year from July 2010 through June 2012, to $115 per year from July 2012 through June 2014. If the tax were finally reduced to 5% in July 2014, the government claims the average family would then be $120 per year ahead. It would have paid $940 in increased taxes over the previous four years, so at $120 per year, it would take almost 8 years to make that up. In other words, the Clark “fix’ would eliminate the damage to the average family by 2022 – 3 elections from now. If you believe that nothing else will change in that time, I have a bridge to sell you. The government’s policy is to increase the MSP premium-tax by 6% per year. During the NDP leadership race, Adrian Dix proposed rolling corporate taxes back to 2008 levels and using the revenue to eliminate the tax shift paid for by MSP and residential care rate increases. The BC Liberals laughed and accused him of wanting a 20% corporate tax hike; now they do exactly the same thing, but instead of using the money to stop MSP and residential care hikes, they propose to use it to sell the HST. For a family of three or more, the inefficient MSP premium-tax is increasing by more than $80 per year, offsetting the promised 2014 benefits. All of the government’s tax changes need to be considered as one complete package.

If Clark had promised to deliver her entire fix by July 2012, better yet if Campbell had delivered that package when he announced the tax in July 2009, then there would be an argument that the impact on families is not the primary concern in considering the change. By phasing her promise over several years, with the net benefits not appearing (if at all) until 2022, Clark appears to be up to the kind of tricks that has made the public lose trust in the BC Liberals.

Consider for a moment the effect of a 10% HST (apart from the phase-in issue, other tax changes, elections over the period and BC Liberal credibility). Other things being equal, increasing corporate taxes while imposing a 5% tax (10% HST) on an expanded tax base creates winners and losers. When Campbell announced the HST in July 2009 he identified a short list of major industries that would receive most of the benefits (input tax credits). The losing industries are those that are labour intensive, restaurants and the service sector. The business tax increase makes a bad situation worse for the service sector. Under Clark’s proposal, the service sector would still suffer by having a 5% increase in price and consequent reduction in demand, while paying higher corporate taxes so as to compensate consumers who are hurt by higher taxes structured so as to help mining and other capital intensive industries. No surprise that the restaurant industry wonders what the BC Liberals have against it; the HST was bad enough, the fix is a disaster.

After subtracting point-of-sale rebates, the HST is forecast to raise $5.8 billion in the current fiscal year, rising to $6.2 billion next year (the Dinning panel claimed unexpected HST revenues were much higher than reported by the Ministry of Finance). Using the Ministry of Finance’s figures, a one point cut in 2012-2013 would mean a loss of $885 million in revenue. The Ministry of Finance estimated that corporate income taxes would raise $1.9 billion next year; ironically the identical amount that corporations are expected to save as a result of the introduction of the HST. Raising corporate taxes by 2 points (20%) would take BC back to 2008 levels. If a 2 point hike raised 20% more, the revenue increase would be $380 million, $505 million short of the lost revenue from a one point reduction in the HST. The complete “fix” to 2014 leaves a hole of more than $1 billion in the provincial budget, but that wouldn’t come to light until after the next election. That’s when it would be discovered and be the reason for either increasing tax rates or drastically cutting services. By comparison, a return to the PST/GST would be revenue neutral except for excess HST revenues beyond what the government revealed, i.e. the tax grab portion of the HST.

It is true that reinstating the PST will require the re-establishment of a collection division, but that is trivial relative to the costs consumers are paying. It is true that in a worse-case scenario, the federal government will demand complete repayment of the one-time $1.6 billion transition fund. That means honestly re-stating the debt as it would have been after the 2009 election.

Christy Clark’s Hail Mary pass has resulted in the referendum being a question on whether she can be trusted. She might have been better off to stay neutral and say that she would fully respect whatever decision the voters chose to make with respect to the HST.