Aug 26, 2011

So the HST was defeated. Now what?


Earlier today, Elections BC announced the much anticipated HST referendum results. British Columbians have voted to scrap the HST.

The best part about having the results is that now we can move on from the narrow issue of what type of sales tax is better and focus our energies on some of the bigger issues affecting British Columbia.

Since the HST was first announced in the summer of 2009, it has dominated the policy debates in BC despite the fact that either way, the tax was going to have only marginal effects on the economy.

Yes, the HST is slightly more economically efficient than the PST. But the difference has been vastly exaggerated by HST proponents, who also refused to acknowledge that the tax is unfair to modest and middle-income families.

This is hardly surprising to readers of this blog who may recall me making this point before:

The HST is certainly an improvement on the PST from an economic efficiency point, but it’s a relatively small improvement. I am convinced that the economic benefits touted by the BC government and over exaggerated and the significant job growth, in particular, will not materialize.

The reason why HST only has a marginal impact is that taxes play only a marginal role in investment decisions. The main determinant of investment is expectations for future sales, driven in part by the general economic environment. Proximity to markets, the availability of appropriate infrastructure, access to cheap energy, access to a skilled labour force, and political stability are all much more important considerations when a firm is choosing where to set up shop.

The independent panel report, commissioned by the BC government, estimated that the actual economic impact we can expect from HST falls far short of the “giant leap” touted by U of Calgary’s Prof. Jack Mintz. For example, while Prof Mintz estimated 113,000 new jobs and 8% increase in capital investment by 2020, the independent panel found that we could realistically expect about 24,400 more jobs and 4% increase in business investment over the same period.

While I personally would have preferred to keep a reformed version of the HST, I think it’s counterproductive to fret over marginal efficiency differences after the people have spoken.

I’m also glad to see a return to somewhat improved tax fairness. We have witnessed a very large increase in income inequality in BC over the past 20 years, and we need to be very careful not to pursue policies that will make this problem worse — like the HST.

Recent research we’ve done at the CCPA shows that the HST is only one piece of an inequitable provincial tax system, a system in which the richest 20% of British Columbians pay a lower overall/total effective tax rate than the rest of us. Much more needs to be done to make sure everyone contributes a fair share to fund the the services and infrastructure BC needs in.

Now that the HST debate is over, it would be great to see some of the energy and focus many academics, business and community leaders dedicated to debating the HST be redirected to designing and debating solution to the real challenges facing BC.

Our unemployment rate remains high and slightly above the Canadian average at 7.3%. The economic outlook has worsened considerably over the last 6 months, with or without HST. There’s a serious risk of our main trade partner, the US, going into a second recession, which may push us back into a recession as well. Canadian corporations are not investing, even in the HST provinces. That’s because it’s not about taxes!

In the meantime, BC hasn’t had a budget and significant policy changes since Feb 2010. The Feb 2011 budget, tabled in the midst of a party leadership race, was prepared as a “placeholder” budget, padded with unusually large contingencies and forecast allowances to leave the new Premier room to implement their own policy priorities. Premier Clark has not tabled a budget yet, deferring the decision until after the HST referendum.

Now we know what we’re dealing with, I look forward to debating Premier Clark’s policy priorities for moving forward.

British Columbia families will remain vulnerable, burdened with unprecedented levels of household debt — 160% of income — the highest in Canada. More and more people are retiring with debt. Our housing market is weakening and bank economists are expecting a “correction” (aka, decline). Unemployment rate remains high, and is projected to stay over 7% for the next few years. Wages for those who are employed are barely keeping up with inflation.

The reality is that without a robust labour market recovery and real increases in household incomes, consumer spending will no longer be able to drive the type of strong economic growth BC experienced in the mid-2000s.

We’re still struggling with low business investment after years of corporate tax cuts that were supposed to stimulate investment and productivity. It’s not for lack of money: private non-financial corporations held $471 billion of cash in the first quarter of 2011. It’s also not for lack of competitiveness, or these corporations would have invested abroad instead of keeping the cash.

The problems that climate change poses continue to grow. We need an economic strategy what would invest in people and take bold steps to support a greener economy for our province.

On top of these, persistent poverty and rising income inequality threaten our economic wellbeing. We spend too much paying for the consequences of poverty instead of addressing the root causes of the problem. We are not fully using the skills and productive potential of those in poverty or those whose lower incomes limit the kind of opportunities available to them. Even the Conference Board of Canada has acknowledged that not just poverty but income inequality “can diminish economic growth and undermines social cohesion.

These are the types of issues that should be at the center of the economic debate in BC, not the best type of sales tax.

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