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Rejecting the HST would be costly

After two years of heated debate, many British Columbians are still confused about how to vote in the current mail-in referendum on the HST.

After two years of heated debate, many British Columbians are still confused about how to vote in the current mail-in referendum on the HST. The choice before them is to either keep the HST - which the government has promised to reduce to 10 per cent from 12 per cent - or restore the old PST/ GST system at a total rate of 12 per cent.

To help British Columbians decide, we have calculated the impact of restoring the PST/GST on the tax bill of B.C. families (with two or more individuals) at various income levels using the Fraser Institute's Canadian Tax Simulator.

The bottom line is that, regardless of income, restoring the PST/GST means higher taxes for all B.C. families.

If the HST withstands the referendum, Premier Christy Clark's government has promised to reduce the provincial portion of the HST rate from seven per cent to six per cent on July 1, 2012 and to five per cent on July 1, 2014. While it is impossible to accurately forecast incomes and spending patterns three years from now, our analysis accounts for all the tax changes of each referendum option and assumes full implementation this year.

First, our estimates indicate that families at all income levels will pay more sales tax under the PST/GST. This increase is due to the higher PST/GST rate (12 per cent PST/GST versus 10 per cent HST); it ranges from $197 for families earning between $20,000 and $40,000 (the lowest income group), to $1,124 for families earning between $120,000 and $140,000 (the highest income group).

Second, personal income taxes will likely increase under the PST/GST. In 2010, when the provincial government first introduced the HST, it enacted personal income tax relief and a new B.C. HST credit to mitigate the impact on B.C. families. If these income tax reductions are rescinded with a PST/GST referendum victory, all families will pay more personal income taxes. Families with income between $20,000 and $40,000 will bear the largest average increase ($455) since B.C.'s HST credit is reduced as income grows.

Finally, under the HST option, the Clark government has committed to temporarily raise the general corporate income tax rate to 12 per cent from 10 per cent on Jan. 1, 2012 and postpone the small business income tax elimination planned for April 1, 2012.

The rationale for these increases is that businesses should help pay for the HST rate reduction. But the reality is that businesses do not bear the burden of these taxes - people do.

The cost of business taxation is ultimately passed on to ordinary

B.C. families in the form of higher prices, lower wages and lower returns on investment.

As a result of higher business taxes under the Clark government's HST proposal that will be passed on to consumers, employees and shareholders, our estimates show that B.C. families will pay between $50 and $221 less in business taxes under the PST/GST system.

However, these business tax savings will be more than offset by higher sales and personal income taxes.

After accounting for all three tax changes, restoring the PST/GST results in B.C. families at all income levels having a higher overall tax bill than would be the case under the fully implemented 10 per cent HST plan.

Families with income between $20,000 and $40,000 will experience an overall tax hike of $601; families with income between $40,000 and $60,000 will see their total tax bill increase by an average of $424; and families with income between $60,000 and $80,000 will see an average tax hike of $550. Families in higher income groups - $80,000 to $100,000, $100,000 to $120,000, and $120,000 to $140,000 - will also pay more tax overall under the PST/GST ($687, $933 and $1,242, respectively).

Importantly, the increase in the total tax bill will be largest as a proportion of income for families in the lowest income group.

For families making $20,000 to $40,000, the total tax increase under the PST/GST will average 1.9 per cent of income.

For families in the other five income groups, the total tax increase is, on average, 0.8 per cent of income.

Families in the lowest income group are therefore hardest hit by a shift back to the PST/GST.

As British Columbians mull over the referendum question, they must realize that a vote to return to the PST/HST is a vote for higher taxes. Even if voters are skeptical of the economic benefits of the HST - which include increased investment, jobs, income, and general prosperity - at the very least they can be sure that keeping the HST means a lower overall tax burden for everyone.

Charles Lammam and Milagros Palacios are economists at the Fraser Institute.

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