Will HST really strengthen the BC Economy?

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Table of Contents

Introduction
“The HST will strengthen the B.C Economy”
Conclusion
Works Cited

Introduction

Last year (2010), the government of British Colombia declared its intention to harmonize PST with the federal GST. According to the declaration, the government intends to replace the existing tax (PST – Provincial Sales Tax) with a new harmonized tax referred to as the “Harmonized Sales Tax” (HST).

This move has brought in an ongoing debate in which some people are supporting the new tax while others are opposing it, with each group giving out its own views. The basic issue here is whether the new tax will strengthen the B.C economy or not. However, the truth is that this new tax will be of great benefit to the Province’s economy and will play a major role in strengthening it.

While the debate goes on, very minimal focus has been put on the implications the new tax has on a wider macro-economic situation. Among the people who oppose the HST, there are those who are worried about the issue that this tax will take back the economy in to recession. But it should be realized that, since this tax will only substitute a tax that is already there, the level of the tax burden will not go up. It is expected that the amount of revenue that will be received by the B.C government will be at almost the same level as before.

This implies that, in general terms, the businesses and the households will have unchanged overall “spending power”. When the HST is adopted, even if the level of “consumer spending” may go down a little bit while more services are subjected to sales tax, the level of business expenditure and B.C exports will go up and therefore; the HST will strengthen the B.C economy, providing more jobs and higher incomes to people over time.

“The HST will strengthen the B.C Economy”

There are various reasons as to why implementation of the HST makes business sense more than PST. One of the reasons is that implementation of this tax will bring in increased competitiveness. By doing away with PST, which the businesses in B.C pay, the new tax (HST) will make it possible for B.C to become more competitive.

Although PST is always looked at as “a consumption tax”, the truth is that this tax applies both to consumption and production. It is estimated that, about 40 percent of the revenue received form PST is brought in by businesses after paying for the inputs they purchase to carry out their business operations (“HST Vital to sustaining economic prosperity in B.C” 1).

While the burden brought in by PST is done away with, a large number of business organizations will now stand a better chance to engage in investing and they will be able to realize sustainable growth. In addition, these organizations will also create more jobs for people.

Another reason why adopting HST makes greater business sense is that this tax will encourage investment. “Experience in Atlantic Canada and other jurisdictions confirms that shifting to value added tax like the HST paves the way for increased capital spending on machinery, equipment, structures and new technologies, and other productive assets” (“HST Vital to sustaining economic prosperity in B.C” 1).

Having more business investment is supposed to stimulate economic growth, lead to creation of more jobs and realization of higher levels of exports and productivity. All these are of great advantage to both laborers and consumers.

Another economic sense resulting from the adoption of HST is that, there will be “reduced paper work” burden. While integration of the B.C sales tax with “federal GST” is carried out, “compliance and paperwork costs will decline for tens of thousands of B.C businesses” (“HST Vital to sustaining economic prosperity in B.C” 1).

In a system where there is no integration of the federal with the provincial sales tax, businesses have no choice but to comply with two separate collections of rules: the federal rules and the provincial ones. The businesses will also have to act in accordance with two separate sets of administrative authorities. Under the HST, the regulatory costs will be reduced to significant levels and this will be particularly advantageous to small business organizations.

More so, by shifting to HST, B.C will now be in a position to obtain additional revenue, amounting to about $1.6 billion, from the federal government. This indicates the existence of a federal policy, which has been there for a long time, meant to “persuade” the provinces “to integrate their sales taxes with the GST in order to strengthen the Canadian economic union” (“HST Vital to sustaining economic prosperity in B.C” 1).

This additional revenue from the federal government can be quite helpful in enabling the province (B.C) to finance maintenance of the main public services as well as the implementation process of the HST.

Another issue concerns the alignment of B.C with the rest of the provinces in the nation. Such provinces as Ontario, Quebec and three Atlantic provinces form approximately 70 percent of Canada’s economy. Adoption of HST will play a major role in putting B.C on “a more even footing within Canada and ensure that needed investment dollars and jobs aren’t lost to other jurisdictions” (“HST Vital to sustaining economic prosperity in B.C” 1).An economy that is thriving must be having a “healthy business sector” as part of it.

By creating jobs and purchasing inputs locally, competitive enterprises greatly contribute to the tax base which the government depends on for financing “development programs and public services” ((“HST Vital to sustaining economic prosperity in B.C” 1). The HST can potentially make the establishments for “B.C’s high standard of living” stronger. This can be realized through the assistance of the HST in the expansion of the “economic pie” and facilitating more and better job creation.

Questions are raised by a number of people about what the impact of the HST on inflation will be. Those who are opposed to the HST believe that the tax will bring in negative impacts in relation to inflation (Shaw Par. 1). Finlayson points out that “since the tax applies to many services that currently do not incur the retail sales tax, consumers will pay higher tax inclusive prices on a range of services such as haircuts, gym memberships, and restaurant meals” (Page 1).

However, the effect of this on the general “consumer price level” will be negligible. This is basically for two reasons; the first reason is that the government does not impose the HST on a number of essential household goods. The other reason is that the cost involved in doing business will reduce the moment the new tax is adopted. This is a very significant HST economic result, although it is one that has been ignored by those who are opposed to the tax (Schreck, Par. 12).

Businesses will derive many benefits from the HST. This point is clearly presented by Finlayson where he points out that doing away with PST tax and substituting it with the HST “will lower the cost of producing goods and services in B.C by some $2 billion per year….as the sales tax the businesses now pay on construction materials, fixtures, vehicles… and other inputs is effectively eliminated under the HST” (Page 2).

The cost reductions are supposed to reflect themselves as “lower pre-tax prices charged to consumers” (Finlayson 2). A number of people do not believe that in the actual sense businesses pass over “cost savings” to the consumers. However, the economic sense and what has been seen and felt by other jurisdictions verify that this is always the case where there is a “competitive marketplace” (“Business owners talk of HST benefits”, Par. 13).

Some of the people who criticize the HST, in line with the issue that businesses will derive benefits from the HST, claim that benefits such as lower costs which HST will bring in will only be enjoyed by the “Big Businesses”. Such a standpoint is on the foundation of inadequate knowledge about the B.C business community and the “industrial structure” of the province.

A larger number of companies in this province are “small businesses”. These are those in the category of businesses having less than fifty employees. A larger percentage of the exporting companies fall under the category of “small businesses”. All businesses buy and utilize inputs that were formally subject to the old tax (PST) regardless of their size.

While big companies spend larger amounts of money in absolute terms on production inputs, there are no many such companies in B.C. According to Finlayson and Peacock, “in some instances the HST should produce proportionately greater savings for smaller enterprises”(Page 6). For a larger number of these firms, the new tax is supposed to offer a “welcome cash flow boost” by making it possible for them “to recover sales taxes paid on inputs previously subject to PST” (Finlayson and Peacock 6).

It is quite important to note that the new tax will play a major role in dealing with the following features of the economy; the unstable export base of B.C, inadequate investment, and slow-moving productivity in the province. These features have been bringing several problems in the economy, including slowing down the real income and wages growth (Finlayson 2).

Looking at investment as one of the features of the B.C economy, Finlayson points out that “the entrepreneurs and workers are more productive to the extend they have access to up-to-date tools, technologies, plant and equipment” (Page 2). This involves “regular investment”. However, investment by in the B.C economy is carried out significantly less on a “per employee basis” as compared to the investment done by the competitors.

This is because, as Finlayson observes “B.C’s existing sales tax sharply increases the effective tax burden on many of the inputs that companies typically invest in including; equipment, construction materials, etc” (Page 2). Therefore, by doing away with the “sales tax burden” from business outlays on the inputs like these, the new tax (HST) will produce an “economic environment” which will favor investment by the private investors.

Looking at the issue of productivity, even if an assumption is made that there are higher levels of immigration, the growth of the “labor force” in the B.C economy will move downwards to a level lower than 1% per annum within the coming ten years.

As this pattern comes out, the economic growth will be centered on “advances in productivity” instead of being centered on accumulating more workers to the labor force. On the national level, it has been realized that the country has fallen behind a number of the rest of the industrialized nations in regard to productivity.

What is not understood well is how B.C has performed poorly in this main area. In Canada, B.C comes in the last position in regard to “output per hour worked” and “increasing productivity” ranking. Some well-known economists concur on the issue that, the new tax (HST) will impact positively on, as Finlayson puts it, “productivity growth – mainly by making it more attractive and more economically feasible for companies to invest in B.C” (2).

Last but not least, it is also realized that the HST will cause the position of B.C as “an export economy” to become stronger. While the “Provincial Sales Tax” (PST) has been in operation, there has been undermining of the success of B.C as an “export power” (Finlayson 2).

The retail sales tax adds a large amount of money to the local exporters’ base and among them, a small number can transfer this cost to the customers. With the new tax (HST) in operation, no longer will there be the sales tax to the exporters in B.C economy. In the absence of an export sector that is much stronger and competitive, realization of sustained economic growth in such an economy becomes very hard.

Conclusion

When the HST is adopted, even if the level of “consumer spending” may go down a little bit while more services are subjected to sales tax, the level of business expenditure and B.C exports will go up and therefore, the HST will strengthen the B.C economy, providing more jobs and higher incomes to people over time. However, there has been a continuing debate about the economic implications of the HST. Some people have been supporting the tax while others have been opposing it.

But those who are opposed to the HST present arguments that either have no ground or are exaggerated and do not give a reflection of a correct reading of the evidence on the economic outcomes of “value added taxes”. On the other hand, as it has been indicated in this paper, there are several reasons why adopting the HST makes great economic sense. The new tax will offer long term benefits to the B.C’s economy.

The benefits that will be realized include creation of more jobs, increased productivity and also, increased competitiveness in the export market. More so, the businesses in the province will realize less “tax compliance” burden. Therefore, considering the benefits that are to be enjoyed following adoption of the HST and its ability to strengthen the B.C economy, there is no need for people to continue debating about this issue. The tax should be adopted for the benefit of the people of B.C over time.

Works Cited

“Business owners talk of HST benefits”. CTV News. Ctvglobemedia, 2011. Web.

Finlayson, J. HST will B.C. become more competitive in many ways. 2010. Web.

Finlayson, J., and Peacock, K. HST Misconceptions. Business Council of British Colombia, 2010. Web.

“HST Vital to sustaining economic prosperity in B.C”. 2010. Web.

Schreck, D. Campbell’s HST debate with James. Strategic thoughts. 2009. Web.

Shaw, R. HST pushes inflation rate above national average: Economists. The Vancouver Sun, 2011. Web.

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Will HST really strengthen the BC Economy?

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