Double Blind

(Cross-posted with BC2013)

There has been so much spin about the HST. My post comes from both an accounting background and a physics background (two professions that might seem quite distant have a lot in common). I am also very well versed with income tax legislation and government policy concerning finance in general.

Both sides of the HST debate have spun the facts so hard that it is difficult to get legitimate analysis on it. The following is an attempt at clarifying the HST, as I see it.

Q: Who wins with the HST?
A: Businesses that have high amounts of inputs that they previously would have paid PST for – they can claim these as input credits with HST. Generally, this applies for businesses that deal with products as opposed to services. So industrial companies, or manufacturing companies would be a significant winner with the HST.

Q: Who loses with the HST?
A: On the business side, any businesses that have their costs dominated by labour and/or non-PSTable items. Examples include restaurants and consultants. Individually, almost everybody is going to end up paying more in consumption taxes than before the HST implementation. It is impossible to conceive of a scenario where ordinary middle-aged working individuals will pay less tax with the HST, even when factoring in the increase in the basic exemption (the amount of income you can earn without paying provincial income taxes).

Q: Will prices drop as a result of HST?
A: Only in those industries that have significant amounts of PST on their business inputs. It is also unlikely these price increases will be seen immediately – it will be subtle and impossible to measure, although in theory competitive industries should realize some price decreases in the medium and long term had HST not been implemented. The real strategic issue is that the HST benefits manufacturing, and manufacturing has been consistently been outsourced across the Pacific (to countries like China, India, Thailand, etc.) – HST will clearly enable us to be more competitive with manufacturing, but since labour costs are also a significant cost input, I haven’t seen any clear analysis to establish that we will be able to draw in more manufacturing capital. A lot of the theory behind the positive aspects of HST depends on capital asset purchases being a detriment to manufacturing, as opposed to high labour costs (which the HST does not address at all).

Q: Will HST increase my wages?
A: Very, very, very indirectly. The theory is that with increased investment, you will have demand for labour, and with labour demand, this will result in increased expectations for wages. The answer to this question is much closer to “no” than it is to “yes” and to claim that HST will result in increased wages is simply not true – doubly so if you work in a service industry.

Q: What products will cost less after HST?
A: Children’s disposable diapers. Before, they were subject to 12% (GST+PST), but they will receive a provincial exclusion on HST. The tax on a hotel room was 13% (8% provincial, 5% GST), which will be 12% after HST. Other than that, I don’t know of anything that will become cheaper. A side note is that liquor (beer, wine, spirits) should, in theory, have been cheaper (10% liquor tax plus 5% GST applied, 12% HST after), but the BC Liquor distribution branch is pocketing the extra 3% differential after July 1. (Update: A voice out there pointed out that if you drank the liquor from a restaurant it would be subject to 12%, while previously it would be subject to 15%; it should also be said, liquor is probably one of the only input credits available on non-capital expenditures in a restaurant, and the liquor would have to go through the LDB anyway, so presumably the 3% price increase is being passed on – the net result is that liquor will cost less for restaurants to purchase because they get an input tax credit on the entire tax amount, but patrons should experience the same price.)

Q: What services will cost the same after HST, and what will change?
A: Legal bills, auto mechanic bills, cell phone, “special” cable service, long distance calls, and internet are the significant services that were subject to PST and thus will not change after HST. All other services that were not subject to PST will now have the full 12% HST applied and will cost more.

Q: Explain the impact on my condominium/townhouse strata fees.
A: Although the fees themselves will not be subject to any consumption taxes, embedded within the strata fees are services (e.g. maintenance contracts, gardening, alarm security, etc.) that will likely be subject to HST when they were not subject to PST previously. Since GST/HST is not refundable to a strata, it is very likely that residents will pay more upon the implementation of HST – given the strata statements I’ve analyzed, I would guess you would see roughly a 4-5% increase in your strata fee.

Q: What about me going to McDonalds/Tim Hortons/Starbucks?
A: Other than relatively minor recoveries on capital equipment, it is unlikely the restaurant industry will decrease prices simply because they don’t stand to gain much with HST – in fact, because the bottom-line price is higher due to HST, they will witness some degree of demand destruction – take the example of a $1.30 coffee at McDonalds, your $20 bill could buy 14 coffees. With HST, that goes down to 13 coffees – although this is a very subtle change, the fact remains that you will be able to buy 7% less coffee with the same amount of money. Subconsciously, since it is unlikely you will change your coffee habits, something else in your budget will have to change as a result – or if nothing else changes, it will eat into your net savings. One thing that can be promised, however, is that the price of coffee will not go down by 7% after the HST is implemented.

Q: What about the tax credit for lower income earners for HST?
A: This affects single people making less than $20,000 a year and couples earning $25,000 or less a year. This is a political payoff mainly to retired seniors. It will not affect most ordinary middle-aged working British Columbians. In particular, this spin by Colin Hansen was particularly reprehensible since not only was he re-hashing previously revealed facts about the HST implementation, but he’s expounding on a federal benefit (the GST/HST credit) that the provincial government has nothing to do with. Whoever wrote this press release should be given a 10/10 for spin, but a 0/10 for ethics.

Q: What is the best case you can make that the HST is good for individuals?
A: HST will reduce costs for “product-heavy” industries, making BC more cost competitive. In theory this should increase investment and with investment comes tax revenues for government, and in some cases, employment. The HST will also promote specialization and horizontally-integrated (as opposed to vertically integrated) companies in various industries (as there is no longer a PST penalty to pay for inventory transfers). The benefits of HST are very indirect to measure, and very uncertain to measure as it is not entirely clear that these benefits will be realized.

Q: Aren’t consumption taxes “better” than income taxes?
A: Not necessarily. The argument is that consumption taxes represent a choice – you can choose to avoid consuming in order to avoid paying a higher tax. However, this argument falls flat when you consider that many necessary items in life require the payment of HST, such as toiletries (e.g. toothpaste). In theory, this model could work if the government purely taxed consumption instead of income, but no government will ever do this since income taxes represent such an ‘easy’ source of income.

Q: Who is this economist Jack Mintz the government always quotes, what was his research?
A: The government has always been quoting this study by Jack Mintz. Unfortunately for Mr. Mintz, the government focused on a single paragraph in the report, when Mintz was comparing the effects of both corporate tax decreases and the harmonized sales tax on capital investment – the only issue is that capital investment is not operational cost savings. Previous experience in the Atlantic provinces would suggest that the positive effects of harmonization are significantly less than advertised. It should be noted that other economists have been quite silent about this issue, probably both for political reasons and policy reasons.

Q: What about the $1.6 billion the provincial government received?
A: This reflects about $350 per British Columbian, but the government is going to eventually spend it. The government’s primary budget issue is not one of revenue, rather it is one of trying to figure out how to cap spending on healthcare and education without killing themselves politically. The money is a nice bonus for the government, but should have factored little into the decision to get into the HST.

Q: Didn’t they say the HST revenues goes directly into healthcare?
A: About half of the province’s expenditures go into health services. So yes, you could say half the revenues do go into healthcare. To say the HST is ‘dedicated’ to healthcare, however, is not true.

Q: What should have the provincial government done instead, politically speaking, if they had to do implementing something like the HST?
A: The best interim measure the government should (and could!) have taken is to introduce the concept of input tax credits on the provincial sales tax. This would have likely caused much less uproar than harmonizing the sales tax. The disadvantage of this is that you still have to retain government staff on the revenue collection side (especially for compliance since abusing input tax credits is the most common fraud for GST/HST processing), and not obtain the $1.6 billion offer from the federal government. Another option would have been to have a significant increase in the basic exemption while implementing the HST – basically a shift from income to consumption taxes. However, the government failed to do either. There are also other minor issues I have with various HST exemptions.

Q: What was the biggest flaw of the Fight HST campaign?
A: Their attached legislation to the initiative petition, the HST Extingushment Act, is very poorly written. It is so poorly written that the people that drafted and reviewed it should be embarrassed – it is like reading a grade 7 essay when it should be graduate level caliber piece of legislation. They also were very over-zealous on the spin (not nearly as bad as the government side) concerning issues such as the government’s list of “before and after HST” price changes, and overplaying their hands concerning use of the media.

Would you like some more questions answered? If so, comment below.

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