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British Columbia Finance Minister Kevin Falcon. (DARRYL DYCK/DARRYL DYCK/THE CANADIAN PRESS)
British Columbia Finance Minister Kevin Falcon. (DARRYL DYCK/DARRYL DYCK/THE CANADIAN PRESS)

Economy Lab

B.C. should cut HST by 1 point, but I'll live with 2 Add to ...

Jon Kesselman is the Canada Research Chair in Public Finance and a professor in Simon Fraser University's School of Public Policy



Economists who toil in the policy area often wait years to get the satisfaction of seeing their proposals implemented, and most often they get nothing at all.



Thus, I was gratified to see that the British Columbia government has decided to adopt much of my proposal last year for "saving" the HST -- contingent, of course, on the outcome of the provincial referendum. And as customary in these matters, the economic analyst gets either more or less than he or she had recommended.

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My analysis of the HST (revised and extended version to be published in the June, 2011, issue of Canadian Public Policy) found that the net impact on B.C .consumers has been to raise the cost of living by just 0.5 to 0.6 of 1 per cent. The data suggests a high degree of pass-through to consumers of the business tax savings from the HST. Accordingly, I recommended that the B.C. portion of the HST be trimmed by 1 percentage point. Given that the HST covers about 55 per cent of all consumer spending, this rate cut would fully insulate B.C. consumers from the switch to HST.



I also suggested that B.C. corporate income taxes could be increased somewhat if more revenue was needed to fill the gap. Even with a small increase in the corporate rate, retention of the HST was sufficiently important to the future growth of the B.C. economy that it would be a small price to pay -- and could be reversed in the future when budgetary conditions permitted. I further suggested that with an HST rate cut that insulated consumers at all incomes, the compensatory HST credits could be reduced or eliminated.



My original proposals were advanced in two op-ed columns in the Vancouver Sun last fall. A Sun editorial on the HST in late November stated that the "Kesselman proposal" was worthy of serious consideration. Kevin Falcon, then a contender for the B.C. Liberal Party leadership, took up my proposal by suggesting a one or two point cut in the HST. Now, as B.C. Finance Minister, he has had the opportunity to move forward with this approach.



But as I said, economic policy analysts typically get -- if anything at all -- either more or less than they might wish. A two-point cut in the B.C. HST is twice the amount needed to insulate consumers from the HST price impact. It would not only reverse the HST's impact on consumers but leave them with prices including the HST about half a per cent lower than they would have been under the old sales tax.



Giving B.C. taxpayers and consumers more than needed to compensate them might be good politics. But it is costly in terms of revenues for a province that is seeking to restore budgetary balance and also maintain needed public services. This reduced reliance on the HST also represents a shift in B.C.'s overall tax mix away from the most economically efficient way of collecting revenues. Corporate income tax, in contrast, is the most economically damaging of the major revenue sources.



And paying rebates to families with children and lower-income seniors during the transition to the first of the two one-point rate cuts further dips into provincial revenues. My research (and parallel research for Ontario) has found that the poor and low earners have been net beneficiaries of the HST because their HST credits exceed their incremental tax burdens. Moreover, low-income seniors have been doubly compensated because they get not only the HST credits but also indexing of their OAS and GIS benefits for the small inflation caused by the switch to HST.



Over all, though, I'm not complaining about the B.C. government's strategy to muster public support for retaining the HST. A return to the old provincial sales tax would be costly to provincial revenues and also to the future growth of the B.C. economy. In my view, two loaves are better than none -- even if my order was for a single loaf.



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