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May 7, 2011

HST Shift

One of the biggest surprises in Jim Dinning's HST panel report is the revelation that the tax is not revenue neutral. If Dinning is correct, going back to the PST/GST would result in a loss of provincial sales tax revenue of $820 million in the first year, $893 million in the second year and more after that. The Ministry of Finance tabled three quarterly reports since the implementation of the HST; why don't those reports come anywhere close to Dinning's figures? The quarterly reports advised of just over $150 million more in HST revenue than was expected due to revisions in estimates of the size of the tax base. Those revisions apply to fiscal year 2010-2011 while Dinning's comments refer to fiscal year 2013-2014, but the difference of $670 million is significant and requires a full explanation from the Ministry of Finance. Who is right, Dinning or Finance Minister Kevin Falcon?

Two of the reasons the issue of revenue neutrality is important are: If the excess revenue is real, Christy Clark and Kevin Falcon may be tempted to use it to help sell the tax. It could finance more tax credits and rebates or a full one point reduction in the tax. It is unlikely that those changes would make much difference in the referendum vote. Ballots must be returned by July 22 but no changes to the HST can be made until a year later; who will trust the Clark government after the deceit of the last election?

In fiscal year 2000-2001, 21.6 per cent of provincial revenue came from personal income taxes. This year's budget has 14.0 per cent coming from personal income taxes. The shift to more regressive taxation includes big hikes in MSP premiums, more gambling revenue, higher Hydro rates and higher residential care fees; meanwhile, corporate taxes were cut. If Dinning is right, the shift will have taken another big jump with the sales tax raising almost 10 per cent more than Colin Hansen and Kevin Falcon revealed.

Interpretation of data on families requires a definition of family. A census family is defined as a couple with or without children and single parent families. Not included in census families are individuals not living with children of their own, living with their adult children or living alone. In 2006 BC had 1,161,420 census families, far fewer than the number of families implicit in the Dinning report which claims that the HST is responsible for an increase in costs of $350 for the average family. The report says that $1.33 billion is shifted to families as a result of the HST. Dividing that by $350 gives 3.8 million which is far higher than the number of families by any definition. The report assumes that 90 per cent of what businesses save is passed-though so the net cost shift to consumers is $673 million. Dividing that by $350 gives 1.92 million which is very close to the number of BC households measured in Statistics Canada's Survey of Household Spending. It appears that household is the definition of family in the Dinning report, although that concept ignores people living in residences for seniors, people on reserves and some institutionalized populations.

Dinning's report included a table showing that 16 per cent of families with over $100,000 in income pay 40 per cent of the HST. In 2008 there were 182,650 individuals with incomes over $100,000. If Dinning's report is correct, there are about 320,000 families with incomes over $100,000, so 137,350 of those families have more than one income earner. Many of the families in that group would not consider themselves to be well off as all it takes is two $25 an hour full-time jobs to yield a combined income in that bracket; of course that bracket also includes families with annual incomes in the millions.

The table showing the 40 per cent figure attributes it to Statistics Canada, but it would have had to come from custom work performed by the agency for the panel or government since nothing like that is available on the Statistics Canada website. Comparable figures for the former PST aren't available, but they are likely the same. Compared to income taxes, the 40 per cent figure indicates that the tax is a shift from high to middle income earners. Data from the Canada Revenue Agency show that in 2008, 9 per cent of individuals with incomes over $100,000 paid 49 per cent of the tax. From those data I estimate that families with over $100,000 in income likely account for over 70 per cent of provincial income tax, but keep in mind that income tax is based on individual, not family, income.

Median family income in BC was $67.890 in 2008. If the panel's graph is correct, the roughly 11 per cent of families with incomes between $60,000 and $80,000 pay about 14 per cent of the HST.

The panel reported that 15 per cent of BC families have incomes under $10,000 per year, and that they are $73 a year better off with the HST and its rebates. Who are the people living in that kind of poverty? There are about 133,000 “BC Employment and Assistance cases” - individuals and families – most, but not all, receive less than $10,000 a year. They probably account for 40 per cent of the extremely low income “families”. Most of the rest are probably low income seniors in receipt of the guaranteed income supplement, although there are also likely to be some students. The 15 per cent figure is a rare admission of the extent of extreme poverty in BC. No one should think that the HST was introduced to deal with poverty. The provincial HST credit offsets part of the increased costs due to the tax.

During his leadership race Adrian Dix correctly noted that when the government increases MSP premiums and long term care user fees at the same time it lowers corporate taxes, you must conclude that the tax increases on families are paying for the business tax cuts. The HST tax shift takes the tax shift to record highs. When Gordon Campbell announced the tax in July 2009 he said the shift was $1.9 billion per year; without explaining how they derived their figure, the Dinning panel reduced that figure to $1.33 billion. Combined with the mistake Dinning appears to have identified in the size of the tax base, there is no way to avoid concluding that the HST is the biggest tax shift in BC history, a shift that is consistent with the direction BC has followed since Gordon Campbell came to power, moving taxes away from the principle of ability to pay.