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May 4, 2011

UPDATE May 18, 2011 Jon Kesselman emailed me to note that his study compared the CPI change in BC to the average of the CPI changes for the other three western provinces of which Alberta was only one. I agree that is what he did and add that different conclusions are reached depending on what role Alberta plays in the comparison.

HST Panel Report Full of Errors

The HST panel chaired by former Alberta Finance Minister Jim Dinning released its report, subtitled “The Independent Panel’s Report May 4, 2011”. They may call themselves independent, but the report reads like an error riddled attempt to sell the HST. It contains contradictions in its estimate of the impact of the HST on average families, errors in the CPI and food sales data it cites from Statistics Canada and misleading claims about taxes on machinery and equipment.

The report (p. 9) claims: “The average family paid $1,169 a year in sales tax under the PST/GST. Under the HST, that family now pays $350 more in sales tax.” The $350 per family assertion is inconsistent with other figures in the report.

The report (p. 8) claims that families pay a total of $1.33 billion more in sales tax after HST rebates and tax breaks are taken into account. It also says that business pay about $730 million less in taxes. The panel noted its assumption that 90 per cent of business HST rebates are passed on to consumers. Using those figures, $1.33 billion less 90 per cent of $730 million is $673 million that is shifted from businesses to consumers. Those figures can be challenged but it is interesting to see what they imply. In addition to the tax shift of at least $673 million, the HST has raised more money than originally forecast, probably because of underestimating the size of the tax base that expanded when services became taxable. The report revealed (p. 18) that the HST is raising about $820 million more than the PST. That increase, combined with the tax shift, means consumers are hit with $1.49 billion more in tax. BC’s current population is 4.55 million so the tax shift, using the panel’s figures works out to $327 per person – that’s per person, not per family as claimed by the panel.

I don’t find it surprising that the panel’s $350 figure appears low. My wife and I have coffee out every day. On just our coffee habit we pay $125 a year more before we look at what the HST does to our cable bill and other expenses, not to mention the cost of re-roofing or painting the house. Most British Columbians who think about the HST can look at their family budgets and discount the credibility of the Dinning panel’s $350 claim.

As justification for its assumption that businesses are passing 90 per cent of their cost savings on to consumers, the panel reported on a comparison of the CPI for BC and Canada. Of course, the HST was introduced in July to both BC and Ontario so comparison to the CPI for Canada is not a neutral comparison. A better standard is to compare BC with the HST to Alberta without the HST as Jon Kesselman did in the report he authored for the BC Business Council. (Kesselman only used figures to December 2010 which produced results favourable to the HST.) We can remove the influence of fluctuations in energy prices since they are not subject to the HST in BC. Comparing the CPI for all items excluding energy between July 2010 and March 2011 shows that BC has experienced a 19% higher increase in prices than Alberta! (The raw index numbers for Alberta are 121.0 for July and 121.9 for March; for BC the index is 112.6 for July and 113.6 for March.) The changes are small until you look at the ratio of change in BC compared to the change in Alberta. It will probably require more than 9 months of data for a full analysis, and economists will argue about what method and index is best for measuring the extent of any pass-through of business savings. Of course, the increase in costs for the average family due to the HST goes up as the cost pass-through percentage decreases, and the most recent CPI data contradict claims that business savings are substantially passed through to consumers.

The panel admitted that some industries suffered short term harm from the HST, particularly the restaurant industry. It tried to minimize that harm with the statement: “Statistics Canada data shows from June 2010 to January 2011 overall industry sales increased by about three per cent in both BC and all of Canada.” The Statistics Canada series on the sale of food services directly contradicts the claim by the panel; it shows that from June 2010 to January 2011 food sales in BC decreased by 0.1% while they increased by 1.7% in all of Canada. It is customary to compare year over previous year figures. The most recent figures (released April 28th) are for February; between February 2010 and February 2011 food service sales decreased by 11.8% in BC while they increased by 2.6% in all of Canada. Of course, it is hard to separate the impact of the HST from the impact of stricter enforcement of drunk driving laws. The Dinning panel has a credibility problem with respect to its claims about Statistics Canada data.

The panel can also be accused of exaggerating potential economic benefits from the HST. It wrote (p. 14): “For one thing, removing the PST from investment in buildings and all machinery makes them less expensive.” It quoted (p. 13) a spokesperson from Tilt Contracting saying: “If we purchase a half-million-dollar machine the tax we get back will actually pay for a new pickup for the operator to drive to work on the machine.” The problem with those assertions is the Campbell government eliminated the PST from production machinery and equipment in 2002!

The panel attempted to argue (p. 13) that there would be some economic benefits from the HST by 2020; it stated: “Economic forecasting – especially over 10 years – is an imprecise exercise.” It then went on to cite estimates of job, investment and GDP growth. Its claims are sufficiently small that it would be impossible to measure them in 2020 against normal growth and other changes that would occur over ten years.

The report began by saying that better information is needed for a successful referendum; unfortunately, the Dinning panel failed to provide better information.