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December 3, 2012

HST Lesson

Observers on all sides of British Columbia's great HST debate agree that was probably the worst handled public policy issue in BC history. One lesson out of that failure is that the public needs to be told the details of any major policy changes, including tax changes, before an election. Does that put the government in a straitjacket such that it cannot significantly increase revenue through changes in tax policy without campaigning before an election on its proposals?

On November 29th, the Canadian Centre for Policy Alternatives (CCPA) published "Beyond the 1%: What British Columbians think about taxes, inequality and public services" by Shannon Daub and Randy Galawan. It claimed: "A majority of British Columbians are willing to pay more income tax if they know it will support specific policy outcomes, and link taxes to quality of life." Although 70% of those surveyed said they paid either "much more" (35.4%) or "a bit more" (34.5%)tax than they think they should, the authors argued the survey found: " when asked if they personally would pay a slightly higher share of their income in provincial income tax to support specific polices, most British Columbians are willing." They reported only 12% said they weren't willing to pay more for any of eleven options put before them, while 19% were willing to pay more for all eleven.

It would take a courageous (i.e. reckless) government to risk its credibility on the CCPA report by proceeding with income tax hikes. The CCPA has an answer for that; its report argued: "Low trust in government and politicians mitigates British Columbians willingness to pay taxes" and went on to say that according to its survey a variety of strategies would increase confidence in government, from making government more open and transparent to reducing corporate influence on public policy.

Look more closely at being open and transparent in the context of the CCPA's survey. Some of the survey's detailed findings can be downloaded from their website in the form of an Excel spreadsheet. It shows that respondents were asked if they would pay more of their income, 0.5%, 1.0%, 2.0%, 3.0% or nothing, in order to accomplish various policy goals (eleven goals were given in random order). By way of example, respondents were told that 0.5% meant $200 per year more in taxes for a person earning $40,000 and $400 per year more for a person earning $80,000. Multiples of those increases were given for 1.0%, 2.0% and 3.0% increases. It was not emphasized that the hypothetical increases were relative to income, rather than relative to the provincial income tax they pay. People with identical gross incomes pay differing amounts of provincial income tax depending on their deductions before tax. On average, using the Canada Revenue agency withholding tables, a $200 per year tax increase for a person with $40,000 in gross income is a 10% increase in personal income taxes for a person with no dependants, and a 14% increase for a person with one or two dependants. A $400 per year tax increase for a person with $80,000 in gross income is an 8% tax increase for a person with no dependants, and a 9% increase for a person with one or two dependents. A spread of 8% to 14% in tax hikes sounds a lot different than 0.5% of income. The CCPA example of paying 3.0% more of income translates to a 60% tax hike for a single person earning $40,000 per year. These examples show that the real world of tax changes is considerably more challenging than a questionnaire on whether people would pay more. The devil is in the details, but it is the details and a clear understanding of them that contributes to whether or not a tax change is acceptable to a majority of voters.

Notwithstanding what might be a bias in how the CCPA's questions were phrased, it is instructive to look at the responses to the eleven policy propositions. The table below, expands on the one found in the CCPA report. Its table consists of the first column with policy options and the second column with what it says is the percentage that would be willing to pay more tax to implement that policy. I expanded the table to include the percentage for each option who said they wouldn't pay anything (no $), and the percentage who said they'd only pay 0.5%. The last column is the sum of pay nothing and pay only 0.5%. Notice that what the CCPA reported as support is one minus the percentage that said they wouldn't be willing to pay anything.

Policy proposal CCPA no $ 0.50% little or nothing
Provide more access to home and community based health care services for seniors 69% 31% 40% 71%
Eliminate Medical Service Plan premiums 61% 39% 32% 71%
Protect BCs forests and endangered species 58% 42% 34% 76%
Increase welfare rates to ensure the poorest British Columbians can meet basic food and shelter needs 53% 47% 32% 79%
Reduce class sizes in K-12 education 52% 48% 29% 77%
Invest in an affordable housing strategy 51% 49% 30% 79%
Make public transit more accessible and convenient 51% 49% 30% 79%
Reduce the provincial debt 48% 52% 30% 82%
Reduce tuition fees for post secondary education by 50% 47% 53% 27% 80%
Create a $10/day child care program 47% 53% 28% 81%
Fund home and building retrofits to reduce BC's greenhouse gas emissions 44% 56% 28% 84%

Far from concluding, as the CCPA did, that "Substantial numbers of respondents are willing to pay a higher share of their own income for each of the different policy options", it looks like a strong majority are not willing to pay more than a fraction of one percent for the options offered. The rejection of tax hikes might have been even stronger if the question had expressed the increase relative to current taxes rather than relative to income.

I agree with the CCPA that "there are steps governments can take to regain the public's confidence"; however, I disagree with some of their steps. The cost of policy proposals needs to be determined and that needs to be translated into exactly what needs to be done to raise the necessary revenue. It is estimated that personal income tax revenue will total $6.9 billion this year. A 0.5% increase in that revenue, as opposed to a 0.5% shift in personal income to government revenue, would yield $345 million. That's a lot of money, but the Ministry of Health requires more than that for just eight days of operation. Transparency and openness mean honest cost accounting and honest descriptions of who will pay how much. Many of the policy options tested by the CCPA are worthy of support, but earning that support requires much more detail on both the cost and revenue side than provided in their report.