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HST fears unfounded; new study clarifies myths about BC’s harmonized sales tax and explains problems with the PST it replaces

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Release Date: June 29, 2010

VANCOUVER, BC—A new report from the Fraser Institute, Canada’s leading public policy think-tank, catalogues and debunks the many myths being spread by opponents of BC’s impending harmonized sales tax (HST).

The report, Countering the Myths Surrounding BC’s Harmonized Sales Tax, also examines the current provincial sales tax (PST) and the negative impacts it has on the provincial economy, and explains why the HST is a less damaging tax.

“If we want government to provide the services we demand, we have to accept a certain level of taxation. Ideally, a government will implement less costly taxes that do minimal damage to the economy. In that sense, the HST is a much better alternative to the current PST,” said Niels Veldhuis, Fraser Institute senior economist and co-author of the report.

The most damaging aspect of the PST is that it applies to items businesses purchase to produce goods and services, as well as to items purchased by consumers at the retail level. Most critically, the PST applies to capital inputs such as machinery and equipment, which increases the cost for businesses of investing in plants, machinery, equipment, and new technologies such as computers and software. This makes it more expensive for BC businesses to invest, expand, upgrade, and innovate. Approximately 40 per cent of current PST revenue is obtained from taxing business inputs, totaling approximately $1.9 billion.

Despite the obvious economic benefits of the HST over the PST, opponents of the harmonized tax have filled newspapers, broadcast media, and the blogosphere with inaccurate – and often outrageous – claims about the tax and how it would affect British Columbians. The Fraser Institute report, Countering the Myths Surrounding BC’s Harmonized Sales Tax, catalogues and explains the realities behind some of the misinformation about the tax.

“With the average BC family paying more than $37,000 each year in taxes to all levels of government, there’s no question the BC government should be looking for additional ways to reduce taxes,” Veldhuis said.

“But we also need to pay attention to the mix of different taxes. In this case, the HST is a positive change because it is actually a less damaging tax than the PST.”

Top 10 Myths and Realities of BC’s HST

  1. Myth: The HST is tax grab that will increase government revenues.
    Reality: The HST is revenue-neutral for the provincial government. While the government will collect approximately $410 million more in sales tax revenue, it will cut personal income taxes to offset the gain.
  2. Myth: The HST is a massive tax increase on average British Columbia families.
    Reality: As a result of the offsetting personal income tax reductions, the HST essentially will have no impact on the total tax bill paid by the average family and no impact on BC’s Tax Freedom Day.
  3. Myth: The HST will hurt low-income groups disproportionately.
    Reality: Under the HST, BC’s tax system becomes slightly more progressive, due to the reductions in provincial income taxes and the new HST credit. This means most families with lower incomes will end up paying less tax overall, while most families with high incomes will pay slightly more.
  4. Myth: The HST will increase the price of all goods and services sold in BC.
    Reality: The HST will have little impact on overall price levels in BC. The prices of previously exempt goods will increase (though not by seven per cent) and the prices of goods and services currently taxed under the PST will decrease as businesses pass cost savings on to consumers. Research shows that harmonizing sales taxes in Newfoundland and Labrador, New Brunswick, and Nova Scotia in 1997, and the move to the GST from the federal Manufacturers Sales Tax (which taxed business inputs) in 1991, all resulted in cost savings being passed on to consumers through lower prices.
  5. Myth: The HST will increase the price of new homes by seven per cent.
    Reality: Only new homes over $556,150 will see a modest after-tax price increase after the HST, but nowhere near seven percent. For example, the after-tax price of a new $600,000 home will increase by approximately 0.3 per cent.
  6. Myth: The HST will shift the sales tax burden from businesses to average British Columbians.
    Reality: The ultimate burden of all taxes falls on people (as consumers, workers, or owners of shares in businesses are affected either directly or through their retirement plans or RRSP accounts). The HST will eliminate around $2 billion in hidden sales taxes British Columbians pay every year and replace them with a more visible sales tax, which ultimately makes the tax system significantly more transparent.
  7. Myth: The HST helps industry but hurts ordinary British Columbians.
    Reality: The HST will make BC more competitive by dramatically reducing the tax penalty on business investment. Lower investment costs will spark more business investment, which will positively affect British Columbians through increased productivity, higher wages, increased job opportunities, and higher rates of economic growth.
  8. Myth: The HST is complicated and will be a nightmare to comply with and administer.
    Reality:  The HST will save businesses an estimated $150 million in tax compliance costs which will, in large part, be passed onto consumers through lower prices and will save BC taxpayers $30 million annually in government administration costs.
  9. Myth: The HST is an attack on specific sectors of the economy.
    Reality:  The HST will lead to a more uniform tax burden by broadening the tax base to include a wider array of goods and services to ensure that fewer sectors will receive preferential treatment.
  10. Myth: The HST will hurt BC’s economy as it rebounds from the recession.
    Reality: The HST will help BC recover from recession more quickly by making the province a more attractive place for investors to locate their capital and expand their operations.

“None of the objections to the HST stand up to scrutiny. And certainly none would be cause for a repeal of the HST,” Veldhuis said.

“If the BC government is going to collect a seven per cent sales tax, the HST is a cheaper, less damaging, and more efficient way of doing it than the PST. Those calling to repeal the HST can’t say anything to change that, and neither the current government, nor any sensible subsequent government, should repeal the HST.”