The BC Liberals' proposal to eliminate the province’s sales tax for a year, and keep it low for years after that, is emerging as a conservative alternative to the challenge of rejuvenating an economy weighed down by pandemic fears and a burgeoning recession.
A sales-tax holiday is being floated elsewhere as a way to lasso tens of billions of dollars that have piled up in the savings accounts of those relatively untouched by the coronavirus’s economic ravages.
But in British Columbia, the idea is being attacked as a handout to the rich, a somersault from the usual progressive critique of sales taxes as an unfair burden on the poor. “It is really astounding to me how the criticism changes to fit the circumstances,” says BC Liberal candidate Mike de Jong, who was the province’s finance minister between 2012 and 2017, when his party lost government to the NDP.
Under the BC Liberals' proposal, the 7-per-cent PST would be eliminated for a year, and reappear the next year at just 3 per cent. In an interview with The Globe and Mail, Mr. de Jong said the BC Liberals would increase the PST beyond that point once the economy recovers – and then only gradually. Rolling back the PST would cost $10.8-billion in the first two years; the party has not provided cost estimates beyond that.
The PST plan has sparked a bit of a political role reversal in British Columbia. The NDP, which campaigned against a harmonized sales tax (HST) a decade ago as an increased tax burden on poorer families, now derides their opponents' plan to eliminate the PST. The left-leaning party is proposing a narrower cut to the PST that would benefit only small businesses. Its big-ticket promise is a one-time $1,000 payment to families and $500 to individuals that would be clawed back from higher earners.
The right-of-centre BC Liberals also seem to have switched lanes. The party burned through considerable political capital in 2009 to create a broader sales tax, the HST, in part to bolster the province’s finances. That tax had a short life; it was overturned by referendum in 2011 and replaced with the resurrected PST in 2013. Now, the BC Liberals propose to shelve the sales tax, which would enlarge B.C.'s deficit for at least two years.
Mr. de Jong says his party’s plan would be preferable to keeping taxes high and recirculating that money through government aid to households. And he contends that a PST holiday would be in keeping with his party’s track record, pointing to the deep cuts in income tax rates the BC Liberals made when they won power in 2001.
In a way, the NDP agrees, saying the BC Liberals’ PST proposal is part of the party’s long history of cutting taxes to favour the rich. A tax holiday would mostly benefit high earners who spend more, the party argues. “It may be $7 in the first year on a phone bill, but it would be $70,000 on a yacht,” said NDP candidate George Heyman, who is Minister of Environment and Climate Change Strategy.
Depending on the metric chosen, both the BC Liberals and the NDP are right. Sales taxes are regressive, eating up a larger share of poorer taxpayers' income. In that sense, a sales tax is the opposite of a progressive income tax, in which the rate rises as income increases.
It’s possible to blunt the regressive impact of sales taxes by excluding some types of purchases and providing tax credits or payments to lower-income people. British Columbia does both, excluding purchases of basic groceries, for instance. Such exclusions benefit lower-income people disproportionately, for the simple reason that they spend a much higher percentage of their income on necessities, with less left over for discretionary spending. But British Columbia’s PST applies to goods that most people would not deem luxuries, including fuel and clothing for adults.
Even with exemptions, lower-income British Columbians do pay substantial amounts of PST. In its most recent budget, the B.C. government estimated how much provincial sales tax various people would pay. A single person with no children earning $30,000, for instance, was estimated to pay $460 a year in PST, much less than the $1,160 paid by a single person with no children who earned $80,000. Similarly, a family with two incomes and two children making $90,000 a year is estimated to pay $1,388 a year in PST; the same kind of family, with income of $120,000 a year, would pay $1,714.
So in one sense, the NDP is correct: Households with higher incomes spend more, pay more tax, and so would receive a higher dollar benefit from the BC Liberal proposal.
But each dollar paid in tax takes a bigger proportional bite out of the incomes of lower earners. In addition, the PST represents a bigger share of the overall tax bill for lower-income individuals and households, mostly because income tax rates are progressive. Looked at that way, the BC Liberal proposal would deliver its biggest benefits to lower earners.
The single childless person earning $30,000 pays a slightly higher percentage of their income in PST than their equivalent earning $80,000. The gap is about the same for the families with two incomes, with the lower-earning family paying a slightly higher percentage of its income.
But the most notable gap is in the effect on their overall tax bill. For the single person earning $30,000, the PST equals 36 per cent of the total provincial taxes they pay – so the BC Liberal proposal would eliminate a large chunk of their total tax bill in the first year. For the higher earner, the PST is just 16 per cent of their provincial tax bill, so they will get a relatively smaller reduction. The pattern is the same for the two-income families. For the lower-income family earning $90,000, the PST equals 23 per cent of total net provincial taxes paid. For their higher-earning equivalent, that percentage is much lower, just 14 per cent.
Left-leaning economists don’t dispute that the regressive PST is more of a burden for lower-income British Columbians. But Marc Lee, senior economist at the Canadian Centre for Policy Alternatives, has a broader critique: The billions that would be foregone in revenue could be better spent in relief targeted to those most hurt by the coronavirus and the resulting recession.
Ken Peacock, chief economist for the Business Council of British Columbia, said he supports the idea of cutting the province’s PST as a way to encourage consumer spending to buoy an economy badly bruised by the coronavirus. He said he was pleasantly surprised that the BC Liberals would eliminate the PST altogether for a year, a more aggressive measure than the 50-per-cent reduction his group had proposed. Mr. Peacock said he is also pleased the NDP is proposing PST exemptions that would benefit small businesses.
Tax and Spend is a regular series that examines the intricacies and oddities of taxation and government spending.
Liberals' PST cuts would just be a gift to the wealthy: NDP
The BC NDP says its rival’s big-ticket promise of steep cuts to the provincial sales tax would be just a gift to the wealthy, and that its own proposal for one-time payments is better for lower-income individuals and families.
“If you wanted to buy a yacht, the BC Liberals are your team,” BC NDP Leader John Horgan said in a Tuesday news conference launching his party’s platform, taking aim at the BC Liberals' proposal to eliminate the PST for a year and then bring it back at 3 per cent in the second year.
Instead, the BC NDP is proposing one-time payments of $500 for individuals and $1,000 for families, a benefit that would be clawed back from higher earners.
Is Mr. Horgan correct? At first glance, it looks to be the case for lower-income earners. A person earning $30,000 would receive $500 under the NDP plan and only $460 from the BC Liberal tax cut in its first year. But that advantage evaporates in the second year, when that person would still receive a $197 tax break, but no further payment under the NDP plan, leaving them $157 better off.
The BC Liberal plan would bring additional savings in later years, but the party has not specified what the PST rate would be after the second year. For higher earners, the PST reduction would be even more advantageous.
For some families, the NDP plan (in the first year) would be a slightly better deal. A single parent earning $60,000, for instance, would receive a $1,000 one-time payment, but would save $924 in PST under the BC Liberal proposal. However, a two-income family earning $90,000 would be better off with a PST cut, even in the first year, with savings of $1,388.
So for a few recipients, the NDP plan would be a bigger benefit, but only for a year (although the party says that its plan would cost billions less than that of the BC Liberals). However, Mr. Horgan is correct in saying his proposal would not help the wealthy. The NDP benefit would be entirely clawed back for any individual earning more than $87,000 and any family earning more than $175,000.