By promising to cut the Harmonized Sales Tax, British Columbia Premier Christy Clark is doing her best to rescue a sound policy that she reluctantly inherited. The move may make victory in the June referendum on the HST more likely, but it is an imperfect compromise, to say the least, and one that comes with considerable political and policy risks.
The B.C. government announced on Wednesday that the HST rate would be cut from 12 to 11 per cent in July, 2012, and from 11 to 10 per cent in July, 2014, should the referendum pass. In an attempt to side with families over businesses, Finance Minister Kevin Falcon also announced a new set of HST rebate cheques, corporate income tax increases, and a postponement of a small business tax cut.
The move is intended to inoculate the Liberals against many of the perceived pocketbook concerns that drove opposition to the HST. In the short term, harmonization will cut into the incomes of most families; those making $40,000 to $60,000 a year can expect to forgo $366. With the changes, Mr. Falcon says they'd be $81 in the black, a total gain of $435.
Consider, though, the downsides. B.C.'s public finances are, or were, getting better, with a $450-million reduction in the 2010-11 deficit over what was planned. The budget is supposed to be balanced in 2013-14, but the $900-million forgone from the HST cut, and the $200-million in new rebates, will make that job much tougher; the other tax increases announced by Mr. Falcon on Wednesday will not make up for them.
Those tax increases, indeed, undermine much of the good economic story behind harmonization. The main benefit of the HST is the simplification it provides for businesses, and the way it removes multiple taxes on the same inputs before they reach retail consumers. Eventually, that lightens the tax burden on consumers. But Ms. Clark has shown little interest in mounting this kind of defence of the HST.
And in shoring up the ramparts in defence of the HST in this way, the B.C. Liberals are leaving many other political flanks open. They are allowing the NDP, the Green Party and the upstart B.C. Conservative Party to all take a clean run at a policy that, even if made more palatable, has already unleashed a good deal of self-sustaining opposition; voters may see this latest gambit as cynical, coming from a party that sprang the tax on them without warning, soon after winning an election. If the referendum turns into a referendum on the B.C. Liberals, despite the bounce the party has gotten from Ms. Clark's ascendance to the leadership, then even Ms. Clark's mollification may not be enough.
The HST is good policy. Ms. Clark needs to decide whether to stand behind it fully, or abandon it. She is in a political bind, yes, but the announcement on Wednesday may not deter voters, who have the final say, from choosing the latter option.