Tuesday, July 12, 2011

Will B.C. voters keep or kill the HST?

On Friday I wrapped up my two-week assignment writing for for the Vancouver Sun "Your Money" blog with what I thought was a neutral overview of the debate. Reading over the comments I can see that there is no such thing as neutral when it comes to the HST referendum. It really is keep or kill, with a very vocal emphasis on kill. And, the folks who seek to kill the HST seem to be zeroing in on a single major complaint: the HST favours businesses over consumers.

Business v. Consumer
At the root of the "business over consumer" complaint is skepticism about whether or not businesses are truly passing on their savings to consumers. Under the old sales tax system, businesses paid PST on their operating expenses such as power, heat, rent and anything else that goes into making a product or service. Under the new system, many businesses are reimbursed that seven per cent with the idea that they will pass that savings on at the till or use that cash to re-invest in equipment or on improving productivity. Either way, the theory is that when businesses pay less tax the economy grows.

Has B.C.'s economy grown since the HST was introduced last July? According to the Business Council of B.C., the province's economy (according to their "economic index") has expanded, but only marginally. The economy dipped into negative territory in the third quarter of 2010, rose slightly in the fourth quarter and then dropped slightly to a 0.6% gain in the first quarter of 2011.

On the other hand, what has grown with more gusto is the tax burden paid by households. It has been estimated that in 2011/2012 households will pay 1.33 per cent or $1.33 billion more in sales tax while businesses will pay 0.73 per cent or about $730 million less in taxes. 

Business v. Business, Consumer v. Consumer
When you look deeper at the "business versus consumer" complaint, the issue gets even more divisive for each camp. While the "average" B.C. household with an income between $40,000 and $60,000 is paying about $350 more in sales tax, 40 per cent of the HST has been collected from families with a household income of more than $100,000. These higher-earning households have seen a net increase in tax of more than $1,000.

There are inequities in the business camp as well. Businesses that under the old system only had to collect five per cent GST on their services are now forced to charge their customers twelve per cent. This means that restaurants, recreation and entertainment businesses, builders and people who offer creative services (such as myself) have been negatively impacted by the HST.

Speaking with a home renovations contractor recently, it seems that the extra seven per cent has created a slow down in new business as customers now have to factor that extra expense into their budgets. Undoubtedly, the slowdown is likely to continue through the upcoming months until the tax issue is resolved and consumers know exactly what they are going to have to pay if they want to remodel their kitchen.

Financial institutions, insurance companies, doctors and landlords are also negatively impacted by the HST because they do not qualify for the seven per cent rebate that is given to other companies on their operating expenses.

Us v. Them
So what's the bottom line? On the surface, under the HST regime consumers are paying more tax while businesses are paying less but how that plays out depends on household income and the type of business. This is part of what makes the outcome of the referendum impossible to call at this point.

The other part is that it's just weird (I could even say fiscally irresponsible) that our elected officials are giving voters the chance to decide, especially when we know that not every voter is financially literate or fiscally responsible. I do worry that we may keep or kill the HST based on divisiveness and defensiveness rather than on sound financial principles and a clear understanding that whatever happens, we are in this economy together. There really is no us versus them.

As you witness the fallout of the HST versus GST/PST debate feel free to use this coupon for Turbo Tax to save a few dollars on software that will help you deal with those pesky taxes.

Copyright 2011. Laura Thomas. All Rights Reserved.
For reprint permission contact money me at telus dot net.

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