Happy Tax Freedom Day! Monday, British Columbians start working for themselves. In other words, if we had to pay all our taxes up front, we would have to pay each and every dollar we earned from January 1 to June 5 to various levels of government.
This of course, translates into an awful lot of money. In fact, the average British Columbian family with two or more individuals will hand-over about $36,600 in taxes to their federal, provincial and local governments (42.7% of their income).
However, if voters kill the Harmonized Sales Tax (HST) in the upcoming referendum, BC families will likely be celebrating a later Tax Freedom Day.
Here are your options:
Scenario #1: Keep the HST
If voters decide to keep the HST, Premier Christy Clark’s government has promised to reduce the provincial portion of the HST rate from 7% to 6% on July 1, 2012 and to 5% on July 1, 2014.
While it is impossible to accurately forecast incomes and spending patterns three years from now, it is useful to compare the amount of sales taxes we will pay this year with a 12% HST to what we would have paid with a 10 % HST.
Using the Fraser Institute’s Canadian Tax Simulator which is based on Statistic Canada’s Social Policy Simulation Database and Model, we estimate that the average British Columbian family would pay $953 less in sales taxes with a 10% HST compared to a 12% HST.
To help offset the loss in revenue, the Clark government will temporarily raise the general corporate income tax rate to 12% from 10% on January 1, 2012 and postpone the small business income tax elimination that was planned for April 1, 2012 until the budget is balanced.
While the rhetoric surrounding these increases is that businesses should help pay for the HST reduction, the reality is that businesses do not bear the burden of these taxes—people do. The cost of business taxation is ultimately passed onto ordinary BC families in the form of higher prices, lower wages, and/or lower returns on investment.
Our estimates show an extra $196 will be passed on to the average BC family as a result of higher business taxes.
Overall, however, the average BC family receives a $750 tax cut from the reduced HST package. And Tax Freedom Day would have arrived on June 3 rather than June 6. While it might not seem like much, it’s three more days we’d be working for ourselves and not the government.
Scenario #2: Kill the HST and reinstate the 12% PST+GST
If the majority of British Columbians vote against the HST, the province will shift back to the 7% PST and 5% GST and the average family will pay slightly less in sales taxes. Specifically, the average family will pay $257 less in sales taxes if the PST/GST system is reinstated.
However, the provincial government also introduced personal income tax reductions and a new tax credit when it introduced the HST in 2010. Specifically, the basic personal income tax exemption was increased to $11,000 in 2010 from $9,373 in 2009, which reduces the amount of tax individuals pay, and a new BC HST credit ($230 per family member) was introduced to help roughly 1.1 million low and modest income British Columbians.
If these income tax reductions are rescinded, the average family would see their income taxes increase by $183.
Overall, the average family’s tax bill would be $73 lower under the PST/GST system than it is currently. And while any tax reduction is welcome when the average BC family’s tax bill is $36,600, a $73 reduction is negligible and represents a decrease of just 0.2 per cent.
Returning to the PST/GST will result in exactly the same Tax Freedom Day we’re currently celebrating since the move would have virtually no impact on the total tax bill paid by the average family.
In addition, shifting back to the PST will have a very negative impact on business investment and development. BC workers will ultimately suffer from lost productivity resulting in reduced wage growth and fewer employment opportunities.
The rhetoric from opponents of the HST has distorted and misrepresented the impact of the tax reform. Reducing the HST rate by two points and raising the corporate income tax rate by two points is far better for BC families than readopting the PST/GST system.
A vote for the HST is a vote for an earlier Tax Freedom Day.