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August 29, 2011

HST Lesson

Did Finance Minister Kevin Falcon or any of the Liberals learn anything from the HST referendum? Premier Christy Clark promised that the referendum would take place just like a normal election, but she then allowed third-party advertisements without disclosure. We'll never know how many millions were spent on trying to convince people to vote for the HST, but we know the government spent $7 million. It wasn't just the advertising campaign that failed any reasonable test of transparency; information provided by the government and its "independent panel" couldn't be verified. One of the lessons the Liberals should learn from their HST failure is that transparency is essential in order to earn public trust.

The 2012-2013 budget is expected to be tabled in the legislature on February 21, 2012. In addition to budget estimates for the next fiscal year, the document must contain forecasts for fiscal years 2013-2014 and 2014-2015, the PST transition year and the first two full years of a restored PST. It will not be good enough to plug in phony numbers, calling them “placeholders”, as was done with this year’s budget when the government was preoccupied with leadership issues.

Falcon said:

“The return to the PST creates significant pressure on the government budget. In May I outlined the approximately $3 billion-hole created in the fiscal plan over the coming years if we return to the PST.”
“The lower revenues and higher cost of administering the tax in the context of increasing global economic uncertainty are an added challenge for us to manage.”

Falcon’s statement is an example of the government's failure to be transparent. The $3 billion figure can be misleading. We know $1.6 billion of it is full repayment to the federal government of the transition payment; that leaves $1.4 billion over three years that is HST revenue in excess of original estimates that claimed revenue neutrality. The Dinning panel cited the Ministry of Finance as it source when it estimated the cost of returning to the PST. It said the net revenue loss would be $531 million in the first year and $645 million in the second.

When Clark attempted to sell the HST by lowering it to 10% in 2013, she said the reduction would be financed by restoring corporate tax rates to the 2008 level. That means increasing the corporate tax rate from 10% to 12% and postponing the planned elimination in 2012 of the small business tax of 2.5%. Those changes are estimated to bring in $650 million in revenue. If those changes are implemented as part of returning to the PST, the revenue shortfall issue disappears, leaving only the issue of repayment to Ottawa which is a matter of honestly stating the province’s debt.

While some Liberals claim that business cannot take the double hit of restoring the PST and increasing corporate taxes, all that is involved is returning to the corporate tax levels that prevailed after seven years of Liberal rule. Any revenue problem is not a result of restoring the PST; it is a result of tax cuts that went beyond what is necessary to keep BC competitive with neighbouring jurisdictions. Many small businesses will see the restoration of the PST as a benefit, particularly service oriented businesses, and keeping the 2.5% small business tax is not an increase since it has not yet been eliminated.

Ten years in power does something to government’s, making "it's time for a change" one of the most popular political slogans. After more than a decade of rule, the Liberals seem to have lost the ability to be clear and transparent with the public. They might not have what it takes to tell their financial backers that it is necessary to return to 2008 corporate tax rates, but the alternative of cutting services or increasing taxes and fees for families will not fly in the aftermath of the HST fiasco.