Actually I'm quite informed on the issue.
I prefer the old pst/gst sysytem and don't believe claims the HST system will be better for me or our province.
The provinces that have previously adopted the HST system are doing WORSE not better compared to the other provinces.
Tax Impact of B.C.’s HST Debate on
Investment and Competitiveness
This article1 is reprinted with permission from:
Jack M. Mintz
Palmer Chair in Public Policy
School of Public Policy, University of Calgary
If voters kill British Columbia’s Harmonized Sales Tax (HST) in a June referendum, the province’s economy will suffer in the long run. A rejection will spur the rebirth of the provincial retail sales tax, leading to steep increases in the marginal effective tax rates on capital and costs and a corresponding dip in investment and job creation. Should voters decide to keep the HST, B.C. will reduce the tax by two points over the next three years and raise the corporate income tax rate to bridge the revenue gap. This will also negatively impact corporate competitiveness, but since the government has indicated that the hike will be temporary, retaining the HST is the best option for B.C.’s economy.
In the past week, I received a number of requests regarding the tax impact of British Columbia’s recent HST announcement on competitiveness and in comparison to the re-adoption of the PST (“retail sales tax”) if the referendum succeeds. Below, I provide an evaluation regarding a new HST proposal in terms of its impact on B.C.’s cost competitiveness in comparison to the existing system and one in which the HST is replaced by the PST.
The B.C. proposal to reduce the HST rate by two points and raise the corporate income tax rate by two points is far less harmful to the province’s economy than readopting the PST. If the new package helps convince B.C. voters to reject the referendum to extinguish the HST, then this will be quite important to B.C.’s competitiveness.
B.C. Premier Christy Clark’s government has introduced a potentially dramatic tax reform. Should the referendum fail to extinguish the HST, B.C. will reduce its part of the HST rate from seven per cent to six per cent on July 1, 2012 and by a further point on July 1, 2014. The government estimates that each family will see a reduction in sales tax payments equal to $470, more than offsetting the estimated increase of $350 in sales taxes after replacing the PST.
Given the revenue cost of reducing the HST rate, the B.C. government is raising the corporate income tax rate from 10 to 12 per cent for large companies on January 1, 2012. The small business corporate income tax elimination planned for April 1, 2012 is postponed indefinitely. B.C. will also slightly increase tobacco taxes and provide a one-time payment of $175 for each child and senior (the payment is to be covered by contingency funds).
The tax impact of reducing the HST and raising the corporate income tax is to reduce the marginal tax rate on labour but increase it for capital. This is a worrying policy development since B.C. will shift from a tax with less economic cost (the HST) to one that is more harmful to the economy (the corporate tax).2 Nonetheless, the short-run impact of the proposal will have only a slight negative impact on B.C.’s cost competitiveness. Over the long run, the higher corporate tax rate will reduce capital investment, impair technological adaptation and hurt productivity. It will be important for B.C. to reduce the corporate rate back to 10 per cent as soon as the budget balances.
The table below provides estimated marginal effective tax rates on capital and labour for B.C. for the current sales and corporate tax system, the proposed tax reform announced on May 25 if the HST is maintained and the impact if B.C. returns to the PST. The marginal effective tax rate on capital is the annualized value of corporate income, capital and sales taxes on business purchases as a proportion of the pre-tax rate of return on capital. The marginal effective tax rate on labour is the weighted average of personal taxes, employer and employee payroll taxes and sales taxes as a portion of the pre-tax cost of labour faced by B.C. businesses when providing additional hours of work to workers.3 I also compute the marginal tax rate on the cost of doing business – this is an aggregation of taxes on capital and labour, using the assumption that 30 per cent of labour taxes are shifted forward in negotiated labour costs.
Reducing the HST rate from 12 to 10 per cent will lower the marginal effective tax rate on labour by about 1.1 percentage points since workers will have greater purchasing power to buy goods and services with lower tax-inclusive consumer prices. The reduction in labour taxes will have some beneficial impact in encouraging employment and labour supply, although economic studies do show that labour taxes are not as distortionary as taxes on mobile capital.
On the other hand, B.C. is making its corporate income tax system less competitive, especially given the increase in the corporate income tax rate on large businesses. The marginal effective tax rate on capital will rise by 1.5 percentage points with a two-point increase in the corporate income tax rate. The effect of raising corporate taxes in the long run is to reduce capital investment and the adoption of new technologies (which are typically part of new vintages of capital).
Overall, the effect of the proposed changes announced at the end of May by the B.C. government on cost competitiveness is remarkably small in the short run, given our shifting assumptions (30 per cent pass-through of labour taxes). The marginal effective tax rate on costs rises by 0.1 percentage points from 18.5 to 18.6 per cent. The proposed changes will favour labour-intensive industries that benefit most from reductions in taxes on labour (and lower wage costs). However, capital-intensive industries will be worse off.
If the referendum results in the end of the HST, the effect of shifting back to the PST will have a very negative impact on competitiveness. The marginal effective tax rate on capital rises to 28.8 per cent and the marginal effective tax rate on costs rises to 21.8 per cent from 18.5 per cent. As documented elsewhere, this will hurt investment and jobs quite dramatically.
B.C. Finance Minister Kevin Falcon indicated that the corporate tax rate hike will be temporary — the rate would be reduced to 10 per cent when fiscally possible. I do think that it is important for B.C. to return to the 10 per cent corporate rate as quickly as possible when the budget balances. Otherwise, it will be disadvantaged compared to Ontario, Alberta and some other provinces for investment. Further, the revenue increase will likely be eroded as large B.C. businesses shift profits to jurisdictions with lower corporate income tax rates.
Not moving ahead with the planned reduction in the small business tax rate has an ambiguous impact on competitiveness. Although the reduction in small business corporate rates can reduce the cost of investment, it increases a “taxation wall” that impedes small business growth. Further, small business corporate reductions make it easier for those owners who use the corporate form of business organization to avoid paying personal taxes on income shifted into the small corporation.5 For this reason, it is advisable that the B.C. government re-evaluate its small business tax incentives to make them more growth-friendly and less costly in revenue terms.
Overall, the B.C. government’s proposed changes to the HST would not hurt competitiveness in the near term, although a quick reversal of the corporate tax hike on large companies is highly advisable for future growth.
