The Minster’s presentation focused on highlighting the cost of the move back to PST/GST, providing some large numbers for the media headlines, instead of looking at the big picture.

In case you missed the media coverage, the provincial coffers are projected to suffer a loss of $2.8 billion over the next 3 years, relative to the estimates presented in February’s Budget 2011. The Ministry estimates that $2.3 billion of the loss is brought about by the HST defeat and the move back to the PST/GST system.

The Minister argued the impact of the HST defeat is manageable, but warned that:

“We’re going to be very tough on operating expenditures and people need to understand it is going to be a government that is going to be run very, very tightly from a fiscal point of view.”

However, closer look at the numbers reveal that the provincial financial situation is not nearly as dire as it may seem. And that returning to PST/GST is not all that costly, when compared with how much it would have cost to keep the “fixed” HST.

Firstly, comparing the costs of repealing the HST to the February budget estimates is misleading. Budget 2011 numbers did not include the cost of the last minute HST “fix” that Premier Clark announced this summer. Keeping the HST would have involved a significant budget loss relative to the numbers announced in February, as Seth Klein pointed out here. This is why the impact of reverting to PST/GST should be compared to the impact of keeping the “fixed” HST.

The cost of the one time rebates of $175 per child regardless of family income and for low- and modest- income seniors were estimated at $200 million. The government’s news release announced that these checks would go out before the end of the year, so they should be considered as expenses in 2011/12.

In addition, the HST was slated to be reduced to 11% in July 2012, which would have cost the government around $638 million in 2012/13 — 3/4 of the annual cost of a 1 percentage point reduction (estimated at $850 million). In 2013/14 the government would have given up $850 million. And this isn’t even considering that in July 2014, the tax was going to be reduced to 10%, giving up a total of $1.7 billion in revenues every year. At that rate, the government’s actually going to be collecting more revenue with the PST/GST than otherwise.

Some of these extra costs would have been offset by the increase in the corporate income tax to 12% (from the current 10%) in January 2012 and by postponing the small business tax cut slated for April 2012. These would have generated an additional $100 mil  in 2011/12 (1/4 of the annual revenue gain, estimated at $400 mil) and just over $400 million each in 2012/13 and 2013/14.

Thus, the real comparison of the costs of repealing the HST looks more like this:

My analysis shows that the provincial treasury would have faced a shortfall of $800 million even if the HST had survived the referendum. The real net costs of reverting to PST/GST are $1.5 billion, not $2.3 billion.

Of course, using the bigger number is more effective if one were looking to lay the blame for provincial fiscal challenges onto the referendum results.

Now, let’s turn to the total provincial fiscal position. Many analysts/commentators seem to have forgotten that the fiscal plan features unusually large contingencies and forecast allowances over the next 3 years. These total $2.5 billion over the 3 years and thus entirely cover the costs of the HST reversal.

If the HST defeat is not an unexpected event worth dipping into the contingency funds for, I don’t know what is.

As for the forecast allowance, the government has already built a lot of prudence into the budget projections by using economic growth forecasts that are considerably lower than the private sector consensus forecast (2% vs 2.8% growth for 2011 and 2.3% vs 2.8% growth in 2012).

In other words, the BC government has a real fiscal gap of only about $300 million over 3 years relative to Budget 2011, not $2.8 billion. This is a lot more manageable and hardly requires the kind of tight-fisted approach advocated by Minister Falcon.

Some of the media commentary around the fiscal update, such as Vaughn Palmer’s piece in the Sun are suggesting that the BC government is using the current fiscal challenges as an opportunity to punish British Columbians for exercising their rights in the HST referendum. This would be a great mistake. Not only would it go against our country’s respect for democracy, but it would also put a drag on the already fragile recovery (latest job numbers released today show BC is shedding jobs, full-time jobs in particular).

There are elements of the latest reform package I like (which I’ll get to below), but overall the government’s proposed “bold fix” is a classic case of politics trumping good policy.

What’s my beef with the “fix”?

In promising to lower the HST by two percentage points (from 10% to 12% over the next three years), and in sending families cheques this year of $175 per child under 18 regardless of household income, the government is proposing to spend a great deal of money on people who don’t need it.

True, a two percentage point reduction in the HST will benefit everyone, but the biggest dollar savings would go to the wealthiest households (as they spend the most on goods and services). Likewise, wealthy families with children under 18 will get cheques this year that they will hardly notice in their household budgets (even though, collectively, these cheques will cost the public treasury a lot), while low and modest income people without children get nothing. This is not a wise use of public funds –– it makes much more sense to target money to the individuals and households who really need the help. (Ironically, this is what the government is proposing to do for seniors –– offering additional rebates only to low and modest income seniors –– but for political reasons they’ve chosen a different approach for everyone else.)

The government is proposing to partially pay for this change by increasing the corporate income tax from 10% to 12% (meaning, returning the corporate tax rate to its 2008 level). Now I’m all for that. But Finance Minister Kevin Falcon has made a point of emphasizing he sees this change as “temporary.”

But here’s the bigger problem:  Cutting the HST by two percentage points is very expensive –– about $1.7 billion in lost revenue per year once fully implemented. In contrast, increasing the corporate income tax rate to 12% will only recoup about $400 million. That would leave a hole in the budget of about $1.3 billion. So this “fix” would mean the HST is no longer revenue neutral, but revenue negative, and would have to be paid for in either increased debt or (more likely) cuts to public services and programs.  (The government is also proposing to delay further reductions in the small business tax rate, which would save about another $300 million, but again, the Minister has emphasized that this delay is temporary.)

In short, Premier Clark has more or less done the same thing Premier Campbell tried just before announcing his resignation; namely, seeking to win the public over with a promise of more tax cuts, the budget consequences (and money for public services) be damned.

A much better (and cheaper) fix, as I recently wrote here, would have been to keep the HST, expand the low-income HST credit, and fully pay for this expansion with increases in corporate income taxes. But again, what we really need is a full Fair Tax Commission, in which we deliberate over the role of a value-added sales tax within the overall tax system (which would serve us so much better than a referendum on such a narrow question).

That said, embedded in the government’s proposed “fix” are some positive developments that need to be recognized.

The campaigners against the HST should take some satisfaction from the fact that they made the government say “uncle”. The government was forced to admit that the HST shifted too much onto consumers and too much off corporations.

More importantly, the government has now acknowledged that we can increase corporate income taxes and the sky will not fall. It is no small irony that when Adrian Dix proposed during the NDP leadership race that corporate income taxes be returned to their 2008 level, he was accused by government representatives and media pundits of being a “class warrior”. Yet now Christy Clark has proposed doing just that (and even gone a step further with a proposed delay to planned reductions in the small business tax rate).

And another rather delicious irony: those corporate income taxes reductions since 2008 were part of the carbon tax’s revenue recycling regime. Meaning, if the government did actually increase the corporate income tax, they would have to amend their carbon tax legislation, which requires that the tax be revenue neutral. Again, I’m all for that. The CCPA has long said that making the carbon tax revenue neutral (and giving big tax cuts to business) made little sense, and that the carbon tax income should be partially used to fund other climate initiatives. So nice to know the new Premier is now ready to break with revenue neutrality there.

If British Columbians respond to the HST by reducing their consumer spending, the timing of the HST introduction may actually slow down the economic recovery, which should be getting under way next summer. On balance, the effects of sales tax harmonization will be neutral or slightly negative as far as BC’s short-term economic growth is considered.

The BC government and HST proponents from the business sector, on the other hand, rebutted that the timing of the HST is perfect as the tax would spur business investment immediately and create new jobs, thus offsetting any negative effects the HST may have on consumer spending.

Now that the HST has been in for a couple of months, we are starting to get some numbers that allow us to check who was right. Did we need to worry about transitional impacts of the HST or not?

According to TD bank economist Diana Petramala, the introduction of the HST had a pronounced negative effect on the Canadian economy in July. In her analysis of July’s GDP decline (the first actual decline in Canada’s GDP for almost a year), she points to HST in her very first bullet under Key Implications:

•    It’s not all that surprising that Canadian economic growth has started to unwind given the introduction of the harmonized sales tax (HST) in Ontario and B.C., and as the positive impact from stimulus spending is beginning to wane.

Later in the same section she elaborates:

•    The decline was likely temporary in nature. In particular, retail sales in July suffered a heavy blow from the introduction of the HST in Ontario and B.C., and once consumers shake-off the initial shock, growth should continue.

Yes, it’s likely a temporary impact, but we’ve clearly seen that HST has serious transitional effects on consumer spending and the timing is definitely poor.

What of the incoming business investment? Data is not available yet on the third quarter, but whatever the investments may be, they’re obviously not sufficient to make up for the decline in retail spending in July.

Yes, in the long term, a value-added tax like the HST is more efficient than a simple retail sales tax than the PST. However, economic efficiency is not the only goal that government policy should pursue. The BC government has so far ignored other important aspects of the HST introduction, such as timing and transitional impacts. We’ve already seen the impacts on retail spending, but are yet to see how HST plays out in terms of jobs, wages and economic growth before the long run rolls around.

It’s time to give tax economist Jack Mintz’s work another read, as he and his CD Howe co-authors seem to be the only ones who have actually modelled the transitional impacts of HST on the labour market and on GDP growth in their September 2008 paper focused on Ontario. The results are not encouraging: Mintz and his co-authors estimate that Ontario would see temporary job loss for a number of years after harmonization, and a very smaller employment gain (only 5,900 jobs or 0.08% increase in employment) 10 years after harmonization with a provincial rate of 8%. He also finds negative impacts on real wages during the transition.

His paper still concludes that a value added tax will benefit Ontarians, but it warns that transitional issues are thorny and must be taken seriously and explicitly addressed. Something that’s currently not happening neither in Ontario nor in BC.

The ad carried the usual dubious arguments that transferring the cost of taxes from corporations to consumers will create vast economic activity.  What intrigued me was the line:

The Smart Tax Alliance is a non-partisan alliance of 30 business and industry groups formed to support the job-creating benefits of the HST.

I was curious what they meant by “non-partisan” so I turned first to my trusty Oxford Canadian dictionary which defines partisan as:

An adherent or supporter of a party, person, or cause, esp. a zealous supporter.

Now the ad makes it clear these guys are zealous supporters of the HST so I am pretty sure they are not talking about that.

No, I suspect what the ad is trying to suggest is that the group is “non-partisan” in the political perspective: In BC terms that means the choice between the NDP and the Liberals.

This made me more curious.  Fortunately Elections BC has just the tool on their web site to help me with that.  They have a search engine that allows you to find out how much people have donated and to whom they have made the donations.  The search engine can be found here.

It turns out that about half of the Alliance’s members had made direct contributions to political parties in 2009, the year of the last provincial election.  This came to a total of $529,000 to the Liberals, and $23,000 to the NDP.  The NDP got slightly less than 5% of the money that went to the Liberals.  The New Car Dealers gave $275,000 to the Liberals.  They also threw $10,000 the way of the NDP.

Some of the groups that had not made direct contributions to the Liberals in 2009 also had some fairly strong indications of partisanship.  The Business Council of BC, for example, spent nearly $100,000 advertising in support of the government in the run up to the 2009 election.  The Railway Association of Canada made no donations to the Liberals in 2009 but CN Rail, CP Rail and Southern Rail among them gave $50,000 to the Liberals.  Similarly, the Coal Association made no donation but separate coal companies did.  Initiative Prince George is a municipally owned economic development body.  They didn’t donate any money to political parties in 2009, but they did get $68,000 from the provincial government according to the Public Accounts.

Not surprisingly, six of the organizations involved in the “Smart Tax Alliance” are also involved in the legal action attempting to overturn the results of the Anti-HST petition campaign.  The Vancouver Sun reports these six organizations gave $162,000 to the Liberal Party since 2005 and nothing to the NDP.

Many business organizations have good reason to support the HST.  It’s natural that they would want to unload taxes they are paying onto consumers.  But let’s not kid ourselves.  Big business in BC has now become the advertising arm of an increasingly desperate Liberal Party.

This is a good question. According to analysis commissioned by the BC government from economist Jack Mintz, titled British Columbia’s Harmonized Sales Tax: A Giant Leap in the province’s Competitiveness, the shift to HST will bring in 113,000 new jobs by 2010. A similar report by Jack Mintz for Ontaro in November 2009, though with the less grandiose title of Ontario’s bold move to create jobs and growth, estimates that Ontario will see 591,000 new jobs over the next 10 years as a result of harmonization and corporate income tax cuts.

These are large numbers, but let’s not forget that these are only estimates and should be treated as such. How reliable are these estimate? Not very.

They’re based on a simple economic model and are inconsistent with estimates produced by the same economist, Jack Mintz, in a Sept. 2008 CD Howe Commentary piece co-authored with Peter Dungan, Finn Poschmann and Thomas Wilson.

In that paper, Mintz and his co-authors used a different model and estimated that Ontario would see temporary job loss for a number of years after harmonization, and a much smaller employment gain (only 5,900) 10 years after harmonization with a provincial rate of 8%.

Contrast this with the November 2009 Ontario HST paper by Jack Mintz (using the same methodology as the 2010 BC HST report), which makes no mention of temporary job loss and projects job growth which is 100 times larger at the 10-year mark (591,000 new jobs). This seems like a very large discrepancy in the outcomes of the two models, so I emailed Professor Mintz asking for an explanation. Here’s his response:

You are right that two different resutls come out although the exercises were quite different.

The first paper on Ontario with Tom Wilson and Peter Duggan was based on a sales tax reform only with no other tax changes.  At 8 percent, the change was almost revenue-neutral — long run impacts would take time due to capital adjusting slowly.  It was also a fixed price macromodel with taxes only affecting the user cost of capital outside of demand effects.  Short-term employment effects were analyzed.

What I did in the second paper was a simple general disequilibrium model with unemployment but modeling both sales tax harmonization and cuts to corporate income tax rates (tax reductions offset the impact of sales taxes on real wages).  The estimate on job creation is based on long run impact over ten years.

Professor Mintz’s explanation shows that the two results aren’t actually contradictory – both papers find positive employment effects at the 10 year mark (which could be considered long-term), and the most recent paper does not make any pronouncements on the dynamics of getting to that employment growth (so it’s compatible with an initial decline followed by strong job growth towards the end of the 10-year period).

What I’m concerned about is the vastly different magnitude of the employment growth results at the 10 year mark in the two papers. The fixed price macromodel Mintz used in the 2008 paper shows employment gain of 5,900 jobs at the 10 year mark, which is almost negligible given the size of the labour force (0.08% increase in employment according to Table A-2). The general disequilibrium model, on the other hand, produces a number that’s 100 times larger – 591,000. I’m not sure if this includes the effect of the other tax changes, but in the BC paper this same disequilibrium model shows that about 80% of the job growth comes as a result of the HST (113,000) while corporate tax cuts have a smaller effect on jobs (28,000 for a total of 141,000 new jobs). If Ontario’s anything like BC, this would still translate into much larger HST-driven employment growth in the general disequilibrium model than in the fixed price macromodel.

It seems to me that the magnitude of the employment effect of HST is not robust. Given that there are no empirical studies on the employment effects of harmonization in Canada, I conclude that the argument that this tax reform will be a boon for job creation is a bit of a stretch and should not be used as a major selling point of the tax.

As an economist, I agree that value-added taxation is an improvement over the current retail sales tax system used in both BC and Ontario, but it seems to me that many of the projected economic benefits of switching to HST are overestimated, especially those that relate to employment and real wage growth.

Further, the findings of Mintz’s fixed price macromodel exercise show that harmonization increases the level of business investment, which leads to GDP growth, but that this GDP growth is not accompanied by substantial (in terms of magnitude) increases in employment or real wages for workers; it seems to accrue almost entirely to capital rather than labour.

This should make us all really concerned about the distributional considerations arising from sales tax harmonization given Canada’s recent rising levels of income inequality and the real wage stagnation.

Public policy is about choices and trade offs. As a society, we may be willing to impose costs on families in order to pay for goods and services we deem important. If HST turns out to be a boon on the economy and everyone earns higher wages and pays lower pre-tax prices as a result, then the initial costs may be well worth it. But is this what I expect to happen? The short answer is no.

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.

It’s still worth it to move to value-added taxation as it exempts business inputs from taxes and it streamlines tax administration somewhat (though less now that every province gets to determine its own exemptions). But let’s make sure that these efficiency gains are not paid for by low and modest-income families.

While I do not question the move to a value added system of taxation, I see two serious problems with the way the tax is being implemented in BC. First, the low income credit is insufficient to compensate many modest and middle income families that will see their budgets stretched to cover the HST, especially initially while they wait for business savings to be passed on. Hey, we’re already paying the tax, did anyone notice pre-tax prices of anything going down? If so, please post a comment below, I’d love to keep a running list of price decreases.

The second problem I have with the HST is that it shifts taxes from business to consumers. I have heard many arguments that if one is against the HST, one must be again taxes because we need to pay for health care, education, etc. This line of argument is misguided because the extra $2 billion that consumers will be paying now as a result of broadening the tax base are not increasing government revenue. They are merely filling the gap left after providing input credits to business (estimated at $2 billion annually). The government will not have any more money for important services than it had under the PST. Consumers will be footing the bill for a business tax cut, plain and simple.

Note that both of my concerns can be easily resolved within the framework of the value added tax. What’s needed is for the government to increase the low income tax credit amount and to make sure that it phases out more gradually, so more families with modest and middle incomes can get something back. The tax shift can also be fixed — what’s needed is a business tax increase of a similar magnitude. If you believe, like I do, that it’s inefficient to tax inputs of production, then go ahead and exempt them from tax, but tax something else instead. Profits, for example. If you believe that businesses don’t pay taxes, then it shouldn’t matter if corporate income tax is increased — businesses can just pass all taxes to consumers or to their workers.

The problem is that the BC government has shown no interest in having any discussion about how the tax should be structured. The very way they announced the tax without any public consultation and to the surprise of everyone except perhaps a few select Boards of Trade is indicative of this. And implementation really is the key to achieving the objectives the government set itself with the tax — increase jobs and stimulate economic growth to the benefit of all British Columbians.

Implementation design flaws aside, let’s talk about the economic impacts of the HST in our province.

How much of an incentive to make new capital investments will the HST be? The PST by design “cascaded” through the production line, adding costs at every step, but provincial governments were aware of that and tried to remedy it by exempting a large number of goods that were clearly used for production from PST. Most machinery and equipment used in manufacturing was exempt, for example, so the cascading tax was not as big of an issue as the government would like you to believe.

Look at the tax savings that export-oriented industries in BC are expected to realize (according to the governments’ website): $320 million total for forestry, manufacturing, mining, oil and gas, compared to $880 million for construction only:

* Forestry – $140 million
* Mining, oil and gas – $80 million
* Transportation – $210 million
* Construction – $880 million
* Manufacturing – $140 million

It seems clear that the current PST exemptions greatly minimized the cascading impact of the tax for exporters, but they presented more of a cost to construction and transportation industries.

Now with the value-added method of taxation businesses would be able to claim the tax back for business inputs like office furniture, computers, etc. How much would that impact the bottom line? I don’t anticipate a huge rush to invest in BC as a result of the HST because taxes are not the primary determinant of investment.

Yes, all else being equal, a tax change would have an effect, but all else is never equal in the real world.

Expectations for future sales, driven in part by the general economic environment, play a much larger role in investment decisions than taxes. Proximity to markets, the availability of appropriate infrastructure, access to cheap energy, proximity to a skilled labour force, political stability — these are all more important considerations when a firm is looking where to set up shop than the tax system.

Even if a significant capital investment occurs, however, there’s no guarantee that it will translate into large-scale job growth. Remember that all the industries that benefit most are relatively capital intensive, while services, which will be hurt by the tax, tend to be more labour intensive. We may actually see a drop in employment, at least initially, as goods-producing industries move to even more capital-intensive production and service industries scale back if their sales are hurt by the extra consumption tax they now have to charge.

While I agree that we’ll see an increase in business investment and quite likely a GDP boost, I don’t expect to see job growth of the magnitude the government predicts. For a more detailed discussion of the expected job impacts, check my next blog post on jobs and the HST tomorrow.

If you believe in trickle-down theory, you’d approve of the HST and argue that the benefits accrued to the businesses who are the owners of capital should be passed on in the form of higher wages for workers, etc.

However, my recent work on poverty and income inequality in Canada has convinced me that a boost in GDP does not necessarily translate in a boost in incomes for most households. In fact, over the last two decades we’ve seen significant GDP growth while the incomes of the bottom 60% of British Columbian families have barely kept pace with inflation.

This is why my assessment of the HST is more nuanced. I am for value-added taxation, I think it is a better way of taxing consumption than PST. But I think that it won’t be the economic boon the government’s trying to sell it as, and we should be mindful of implementation problems and of the impact the tax will have on modest income British Columbians.

Two studies released earlier this week asked this exact question but came to very different conclusions.

On Monday, the Fraser Institute released a paper arguing that lower and middle income families will be better off under the HST (because of the low income tax credits), while the average family will only pay $44 extra per year under the new tax net of the tax credits. They conclude that the impact of HST on family budgets will be negligible.

The very next day, the Victoria Times Colonist reported that this same average BC household stands to pay $521 more as a result of the tax (see HST will hit some hard: Analysis). These were the findings of a simulation the newspaper commissioned from Statistics Canada.

Now, they can’t both be right, so which one is it?

We’ll have to take a closer look at the way they did the calculations to find out — a classic example of the devil in the details.

Digging into the how of the calculations may seem cumbersome and it makes for lengthy blog posts (be warned!), but it’s the only way to move beyond the he said, she said game that often plays out in the media and understand what’s really going on.

Curiously, both reports start off using with the same tool — Statistics Canada’s social policy simulation database and model (SPSD/M) — the state of the art model that’s used by the federal government (and other researchers) to estimate the costs of proposed changes to the tax system.

The key seems to be in how exactly the researchers model the passing through of savings from business to consumers.

The Fraser Institute is vague about their methodology, basing their calculations on “the Fraser Institute’s Canadian Tax Simulator,” which is developed in house by Institute analysts on the basis of the SPSD/M. Their brief methodology paragraph provides the following explanation:

We use the SPSD/M to calculate a distribution series for each specific type of tax and income. For example, we calculate the amounts of provincial personal income tax paid by each family as a share of the total provincial personal income tax collected. We then use the distribution series to distribute the 2011 and 2012 tax revenue figures forecasted in the provincial and federal budgets to the individual families.

In other words, they start off with the BC government’s own estimate of how much more tax they will collect as a result of the HST and divvy up the extra among households based on what share of the BC sales tax pie they paid last year. No wonder the average household comes out paying so little extra under the HST: the BC government estimates that they will only collect about $410 million more in sales tax.

$2 billion in savings to business gets offset by households paying HST on goods and services that were not subject to the PST before and the Fraser Institute’s calculation assumes not only that 100% of the savings is passed on in the first year of the HST but also that the savings are distributed among households exactly in proportion to the amount of PST they paid last year. These are both highly questionable.

The Victoria Times Colonist enlisted Statistics Canada to run a simulation using the SPSD/M to look at the effects of HST on 15 different household types and 15 different income classifications. They find that the tax change could range in net costs anywhere from $78 for households with single parents and one child to $801 for a married couple with no children (see table).

The SPSD/M by definition assumes that all consumption taxes are passed on to households, but these calculations are obviously passing the savings differently, because they project that households will pay $1.5 billion more in commodity taxes and that excludes higher taxes to be paid on new housing.

This is because the analysts look at the impact of the tax on personal expenditures for households in BC and there are considerable savings for business as a result of the HST that do not accrue to industries producing items of personal expenditures.

Exporters, for one, will realize big savings from HST that will not be passed on to BC consumers. The construction industry will benefit considerably as well, and households are not the final consumers of construction output so they won’t be the ones realizing the savings (arguably, a limitation of the SPSD/M is that it cannot account for household spending on new housing, where we may see some pass-through of savings, though as a current renter I’m not holding my breath).

Given that the biggest business savings as a result of introducing the HST in BC will be realized by forestry, mining, oil and gas, construction and manufacturing — all sectors producing goods that BC households do not directly purchase — it’s no surprise that households will face an extra $1.5 billion in HST on personal expenditures.

This is the main difference in calculation used in the two reports and it explains why they come up with such different impacts for the average households. The Times Colonist/Statistics Canada method captures the tax outlay of British Columbians in a more realistic way than the Fraser Institute calculation, so their findings are likely closer to the true impact of HST on the average households.

Interestingly, the two reports work with different definitions of the BC family. The Fraser Institute only considers families of 2 or more people, leaving out of their analysis almost 1/3 of BC households that are made up of unattached individuals, some of whom — unattached elderly, for example — would likely take quite a hit as a result of the HST. The Times Colonist analysis includes unattached individuals in their definition of households.

What makes the Times Colonist/Statistics Canada calculation much more helpful is that they examine the impact of HST on families of different composition and different income levels separately.

This is important because in reality there is no such thing as the average family — it’s an abstract mathematical construct that doesn’t represent anybody’s experience — and using only averages glosses over potentially large distributional differences in the impact of the tax.

Calculating the average among all families produces particularly meaningless results when we’re dealing with an income-tested benefit, such as the HST low income tax credit. On average, however, BC households will get $147 (the total value of the credit divided by the number of households in BC). This means nothing in practice, as 1.1 million British Columbians are slated to receive some amount of the credit, according to government calculations, while the remaining over 3 million people will not.

The Times Colonist/Statistics Canada reveals large distributional differences in the impact of HST with single parents getting off lightly with an extra cost of only $78 on average, while married senior couples can expect to pay $639 more. Married couples with no children would pay the most, $801 extra on average. While this group tends to be among the higher income families so their HST bill does not necessarily present a public policy problem, claims that the HST won’t take a bite of family budgets in BC simply do not hold up to careful scrutiny.

The government should reconsider the structure of the HST low income credit to ensure that vulnerable households such as seniors and modest-income families with children are not pushed into poverty as a result of the new tax, especially at the heels of a painful recession when unemployment rates remain high (currently 7.5%).

Consider the HST, for example, which the government famously described as “the most important thing we can do for the economy” because it lowers the costs of business investment by $1.9 billion per year. The government chose to tax consumers more in order to keep the shift revenue neutral instead of raising the lost revenue from other business taxes.

While corporate and small business tax rates are getting smaller by the year, the minimum wage has not budged since 2001 and is now the lowest in Canada.

The intuition behind this economic strategy is that lower business taxes and relaxed workers’ rights would make it easier for firms to reap higher profits, thus encouraging them to set up locally. This in turn should create jobs for the local population and bring about economic growth. Jobs and economic growth are expected to, well… lift all boats as the saying goes.

Unfortunately, the type of jobs created by business friendly measures are often not the stable, well-paying jobs that people need to be able to support themselves and their families. As a result, the economic growth that is generated tends to benefit a small minority. In BC, we’ve seen this clearly over the last 25 years, when economic growth was strong yet poverty remained largely unchanged and income inequality increased substantially.

A recent OECD report confirms that job creation is not the be all and end all of social and economic policy. The report, entitled OECD Employment Outlook: Tackling the Jobs Crisis, devotes an entire 45-page chapter to the question “Is work the best antidote to poverty?”

The OECD researchers show that while employment considerably reduces the risk of poverty, simply having a job is not a guaranteed path out of poverty. On average in the OECD, 7% of people living in households with at least one worker were poor. In Canada, this number was higher, 9%.

Working poverty is so widespread that it accounted for close to 70% of all poor people in Canada even during the economic boom of the mid-2000s (roughly the same as the OECD average).

This OECD report is just the latest confirmation of something that social policy researchers have known for a long time: even a robust economic recovery will not eliminate poverty and social exclusion without a comprehensive, government-led poverty reduction plan.

What kind of poverty reduction policies does the OECD recommend? The report acknowledges that poverty is a complex social problem and country-specific factors need to be taken into account, but it argues that “social transfers play a key role, precisely because they can be targeted towards the most vulnerable households: on average in the OECD area, they reduce by almost half the rate of in-work poverty.”

On this front, Canada can and should be doing a lot better. Other OECD reports, such as the 2007 Growing Unequal? Income Distribution and Poverty in OECD Countries, have documented that social transfers in Canada became less generous between the mid-1990s and the mid-2000s, so it should not come as a surprise that our poverty rates (including working poverty) have grown since. BC has been among the worst performers in the country on these measures.

It’s clear that job creation is an important goal, especially at the tail-end of a deep recession, but it should not be pursued single-mindedly, without concern for the workers’ economic security or their ability to earn enough to afford the basics like housing, child care, education and training upgrades.

The type of jobs created matters a lot, which is why the OECD calls for increased training opportunities for those who have lost their jobs as a result of the recession. They suggest shifting “the focus and resources behind activation from the “work-first” approach which tended to dominate prior to the crisis to a “train-first” approach for those at high risk of long-term unemployment.”

Indeed, access to education and training opportunities throughout the lifecycle can greatly improve a person’s employment options and ultimately boosts the productivity of the economy as a whole. Investments in training and education partially pay for themselves with the extra tax revenue collected from higher paid workers. Yet such investments are largely missing from BC government’s one-sided labour market approach.

This is because Ontario’s HST was introduced as a piece of a larger tax package announced in the province’s 2009 Budget. The package includes sizable personal income tax cuts and a new refundable property tax credit, which will also apply to renters (on 20% of rent paid). What the CCPA study finds is that the additional costs of HST for low and modest income families in Ontario will be offset by the new tax breaks they got.

We have not done a similar study for BC yet, but there are two main reasons to believe that the BC results would be different:

1. There are significant differences in what used to be covered by the two provincial sales taxes and what will be exempt by HST in the two provinces, so the additional bite of HST in Ontario and BC may be quite different; and
2. BC’s HST is not accompanied by a big tax package – the income tax cut we got (the increase in the basic personal amount) is valued at $75 per individual with taxable income above $11,000.

It’s interesting to note that the low income HST credits are nearly identical in both provinces. The only difference is that Ontario’s maximum amount is $260 per person, while BC’s is $230. Given that Ontario’s HST is 13% and BC’s is 12%, this seems fair. However, the low income credit alone does not offset the additional costs of the HST for all but the lowest income families.

The BC government’s own estimates show that. Table 2 on p. 84 of the September Budget Update reveals that a single individual earning $25,000 per year will be $85 worse off after the low income rebates, and $13 worse off even after cashing in the personal income tax cut. A BC family of four earning $30,000 is expected to come out $550 ahead, but if they earned $60,000 per year, they’d be about $130 worse off all things considered.

Without Ontario’s personal income tax cuts, and in particular the new refundable property tax credit, there is nothing to offset the additional HST costs for many modest-income BC households.

The good news is that BC’s HST can be fixed. Refundable tax credits are one way to go: they ensure that even low income families that do not owe as much tax still get a benefit, in the form of a tax refund. Another way to do it is by expanding the low income HST credit so that more families benefit, as Marc proposes here.

It goes without saying that the homeless and other marginalized groups who do not file income tax returns will not benefit from relief offered through the tax system, which includes tax cuts and low income credits. CCPA’s report notes this fact, pointing out that these groups will be significantly worse off as a result of the introduction of HST.

However, non-filers represent a very small portion of the Canadian population precisely because all the refundable credits offered though the tax system serve as a strong incentive to file tax returns if one has low income. It is important to ensure that these marginal groups are protected through special measures outside the tax system, but it is not necessary to abandon the tax reform package because a fraction of a percent of the population would not benefit from it.

CCPA’s analysis shows clearly that the vast majority of low income households – those that file their taxes – will be made better off (or at least no worse off) by Ontario’s HST tax package. This, however, is unlikely to be the case in BC.

And it isn’t just the federal Conservatives. Ever since the introduction of the GST, successive Conservative and Liberal federal governments have been pressuring the provinces to harmonize their provincial sales taxes with the GST. Why?

At one level, there is the explanation that harmonization will simplify the sales tax system, allowing businesses to submit only one set of remittances. But I think the real reason is more substantial.

Ever since the original Free Trade Agreement with the US was instituted, the federal government has really had only one core economic development strategy – boosting exports. We have no meaningful industrial strategy. Our federal governments have not had a real vision for the role of government in economic development, strategic procurement, or the nurturing of new sectors. Rather, all the economic eggs have been in one basket –– free trade and export promotion.

Understood through this lens, pushing both the GST and the HST make perfect sense. These moves towards a value-added sales tax mean that Canadian exporters are spared these taxes (at the expense of Canadian consumers), as exporters can get rebates for any sales tax they pay on inputs. So, these taxes will make Canadian and BC exporters more “competitive.”

All of which raises a much more fundamental question: do we really want to hinge all our economic development goals on exports? As we seek to get serious about confronting the climate challenge (and if Jeff Rubin is correct that rising oil prices mean “our world is about to get a whole lot smaller”), does it really make sense to structure our economic and taxation policies around the goal of export promotion? My guess: The era of ever-increasing trade and tourism will soon be coming to a close. We need a new economic plan.

For analysis of the HST by CCPA-BC senior economist Marc Lee, see here

While this is not controversial for economists, public hatred for the GST has never really gone away, and the Harper Tories capitalized on those sentiments by reducing the GST twice. Given these ugly politics, why any sensible provincial politician would go down that road is beyond me, although it explains why we heard nothing about the HST until after the election.

Having said that, in principle there is nothing wrong with harmonization. It simplifies administration, treats all goods and services the same for tax purposes, and allows exporters to reduce their prices since they get credit back for HST they pay on their inputs, unlike the PST. A more efficient tax and a broader tax base are also a good things from the perspective of raising revenues to support high quality public services.

The big problem with the HST is around who gains and who loses in the $2 billion tax shift from business to consumers. Consumers will be paying new taxes on goods and services previously exempt. And while the government has proposed a credit for low-income households with incomes under $20,000, it phases out very quickly after that, leaving a big hit for modest- to middle-income households with hundreds of dollars in additional taxes paid.

There may be some offset to this if businesses that did pay PST pass along their savings in lower prices. The government argues this will be the case on the basis of one study that examined the introduction of the HST in the Maritimes a decade ago. Unfortunately, the study does not adjust for differences in economic conditions or differences in what is covered by different provincial PST, so it is not conclusive. What the study also finds (that has not been mentioned) is that the shift overall is somewhat regressive, largely due to the impact on higher shelter costs, clothing and footwear prices, and that elimination of PST did not so much lead to lower prices as much as slightly lower inflation rates for the goods and services affected. Oh, and the provincial governments also substantially cut the sales tax rate as part of implementation.

Lesson for BC: don’t sit around waiting for prices to fall, and expect that businesses will continue to try to make as much money as possible.

But for all the furor over the HST, fixing it is relatively easy to do. The key is the credit paid back to households. By increasing the threshold of the credit (to say $30,000), phasing it out more slowly (so that a large majority of households get something back) and expanding the value of the credit, the government can protect the most adversely affected households. These actions, combined with using the remaining proceeds to fund public services can turn a regressive tax into a progressive outcome.

This will cost some money but that is why the federal government is providing $1.6 billion in transitional funding. The September BC budget update has the government using not a penny for transition, only to reduce the provincial deficit in each of the next three years.

We should also go one step further: to the extent that businesses sock away away their savings on PST into higher profits this will lead to a windfall for high-income earners in BC (and since 2001 BC’s richest have already racked up huge reductions in their tax bills). So we need to compensate by adding a new top income bracket, kicking in at income above $150,000. Only a tiny fraction of BC taxpayers would ever be affected by this new bracket and it would also raise additional revenues. If the government wants to lower its deficit, they should get it from the people with the most money.