HST Referendum

In June 2011, every individual eligible to vote in provincial elections will be able to vote in a referendum to determine the fate of the recently introduced harmonized sales tax (HST). The key question asked will be: “Are you in favour of extinguishing the HST (Harmonized Sales Tax) and reinstating the PST (Provincial Sales Tax) in conjunction with the GST (Goods and Services Tax)?” Unlike some referendums in the past, this one only requires a simple majority so understanding the differences between the two systems is of the utmost importance.

Since the PST & GST was replaced by the HST (on July 1, 2010) there has been a significant amount of complaints about how the HST has increased the prices of everything. While this may be true in some cases, the impact of this “new” tax has been greatly over estimated. In order to assess this impact, one must first have an understanding of what existed prior to the introduction of the HST and how things have been impacted since the introduction of the HST.

As the name suggests, the harmonized sales tax is the harmonization of the 5% federal GST and the 7% British Columbia PST. This basically means that instead of having a stand alone PST that is levied on some things that the GST was not (and vice versa), the HST of 12% (5% GST + 7% PST) is now charged on all items that the GST was previously charged on. For over 80% of goods and services, there was no change to the percentage of taxes charged as they were previously subjected to both GST & PST and are now only subjected to the HST. Additionally, goods and services that were not subjected to either GST or PST (like basic groceries) remained exempt from the HST.

For goods and services that were previously only subject to the GST but not the PST; the sales tax rate applied has increased from 5% to 12%. Examples of items that have been impacted include: newspapers & magazines, hair cuts, dry cleaning, sporting events, eating out at restaurants and new home purchases over $525,000.

While the extra taxes being paid as a result of the new HST are quite visible, the tax savings that occur from the elimination of the PST are not as obvious. From an economic standpoint, one of the biggest issues with the PST is that it taxes business inputs. In a nutshell, this means that when a company makes a purchase, they would be forced to pay PST and then when they sell their final good or service, they would charge the end consumer PST again. To illustrate this issue, the example of a hypothetical car dealership will be used. First the maker of car tires pays PST on all of their purchases (including raw materials, computers, machinery etc). The manufactured tires are then sold to the auto manufacturer with PST charged again. When the car is sold to the car dealership PST is charged one more time and lastly, the final consumer pays PST on their dream car. It is also important to note that the final price of the car to the consumer has all of the previous PST amounts embedded in the price. In contrast, the new HST is only charged once to the consumer which allows businesses to charge less all the way through the delivery chain. This would result in a less expensive car in a competitive marketplace.

Although HST is a much more visible tax than the previously combined PST and GST, the final cost to consumers is often much less than it appears. One of the unintended consequences of the old PST is that the increased cost of productivity boosting machinery causes businesses to buy less of it. Less productive companies tend to hire less people and invest less money in British Columbia. To top it all off, there will be significant administrative cost savings from businesses only having to collect and track the HST as opposed to the GST and PST. In a competitive market, these savings as well as the savings that resulted from not being charged PST for every purchase would be passed on the consumers.

On the surface, the HST appears to be a tax which mostly increases the price of everything. However, upon closer examination, this is not the case. It is also important to note that Saskatchewan and Manitoba are the only provinces that still charge a separate PST and that the Federal government encouraged British Columbia to adopt the HST by giving the provincial government $1.6 billion. If the HST is “extinguished” in the June referendum, the finances of British Columbia would be negatively impacted if these funds were required to be returned. If this was the case, all tax payers in BC would ultimately be responsible for this repayment.

Troy Peart B.B.A., CFP, CFA can be emailed at troypeart@shaw.ca.Your questions, comments or suggestions for future articles are encouraged.