Sales taxes in British Columbia

PST

Currently, the Provincial Government of British Columbia collects a Social Service Tax as known as the Provincial Sales Tax (PST) of 7% on most of the goods and services. The main difference with the GST is its taxable base since the PST taxation is done disregarding if the good or service is for final use or not (at the difference of the GST taxing only goods and services for final use.

Main tax exemptions

• unprocessed food
• restaurant
• fuel
• children sized clothes and footwear

Tax revenue

The PST revenue is estimated at 5.087 Billions for the 209/2010 exercise from which 2 Billions is directly paid by the business sector. It represents ~13% of the BC government budget.

HST

The BC government has announced on July 23th, 2009, its intention to replace, by July 1st, 2010, the PST by an Harmonized Sales Tax (HST) combining the GST with a provincial tax following the same rule than the GST.

Rationale

The PST being a retail tax, the business sector is subject to a 7% PST on most of its input, so it is put at a competitive disadvantage with business of other jurisdiction not subject to such a taxation. Transferring this tax to the consumer favor both the exportation, and investment in productivity and according several study is a more efficient taxation . It could also disfavor the labor intensive service industry (like hairdresser or hospitality services), where inputs are marginal.

PST/HST revenue adjustment

PST versus HST revenue

While the PST revenue is estimated $5.083 billions, for the 2009/2010 exercise, the HST revenue could generate significantly more revenue, $6 billions according to the projection below,

• Several source concurs to estimate the 5% GST revenue for British Columbia of ~$5 Billions (or a tax base at ~100 billions after the current GST exemption concerning the public sector) , this revenue can be multiplied by 7%/5%, taking account the difference rate, between current GST and proposed additional 7%, to estimate the HST provincial revenue, the taxable base being the same.

This is not taking account the additional windfall of $1.6 Billions provided by the Federal Government, as a consequence of the HST adoption, and collection cost saving estimated at $30 millions.

Mitigation measure

In order to be revenue neutral, the BC government could explore several avenue: The Memorandum agreed between the provincial and the federal government, gives the former the flexibility to

• adjust the tax rate (after a 2 years period, and currently fixed at 7%), according to the above projection, the tax base change could provide room for a decrease of the tax rate of more than 1 point, to keep revenue neutral.
• exempt some service and good in the limit it doesn't affect more than 5% of the tax base

The Memorandum seems to prefer the second path by suggesting exemption of Motive fuel, Children's Clothing and footwear, Children car seats, Feminine hygiene and Books.

Beside it, and following the #rationale justifying the introduction of the HST, the BC government, following the example of the Ontario government, could choose to reduce other tax, reputed inefficient in economic term like personal tax

Critics

rather than decrease the rate of the HST across the board, the government has chosen to favor some special interest group industries, calling several comments

General remark

One will note that all those discretionary exemption defeat one purpose of the HST, which is tax harmonization, with cost saving achieved by red tape reduction.

The HST shift benefits mostly to the capital intensive industry which is mining and forestry in BC. the government having chosen to exclude most of labor intensive service industry of HST tax relief, the tax shift appear to favor the rural BC interior over the urban area riding, and the exemption on motive fuel could be a consequence of this choice. In other word, the tax shift could favor declining legacy industry representing a declining share of the BC GDP .

However, the government has adopted the following policy on goods taxation:

• tax credit on demand elasticity non directly function of the family income, like heating fuel
• provincial HST exemption on demand elasticity directly function of the family income, like children garments.

HST and Green agenda

In 2008, BC has introduced a Carbon tax. In the meantimes it plane to exempt motive fuel of the 7% HST. However the soft transportation mode like bike, bike part and service, currently exempted of PST will be subject to the 7% under the HST umbrella. this lack of readability in the political agenda pursued by the government in regard of the climate action, has been called "pretzel logic" by a Province commentator

Some could explain the reasoning as a way to avoid too much taxes for the motive fuel, already subject to the carbon tax, but then the reasoning should also apply to heating fuel what the BC government is short to do.

Fuel Demand elasticity

it is known the demand elasticity, as a function of price, for motive fuel is very light, so there was a priori little incentive for a government to renounce to the taxation on such item by means of across the board taxes exemption, restraining his ability to reduce price, by means of tax reduction, on sector more sensible to pricing. Whether final price of motive fuel is an issue for economic competitiveness, the provincial government had a way to mitigate the effect of the HST introduction by reducing the motor fuel tax accordingly. Whether the final price is a social issue, the government can also act by a tax credit, leaving choice to consumer to either use it to offset the tax effect, or eventually to shift to less dependable mode.

HST and Sport Agenda

In 2009/2010, the Government spend $70 millions in the promotion of healthy living and sport, but the introduction of HST will translate by a new taxation of 7% for numerous of sport activities:

• biking
• fitness and gym club
• ski passes

what could largely conceal the effort of the ministry of healthy living and sport.

HST and Social issue

HST will affect the heating fuel (previously exempted by the PST), and government plane to provide a tax credit to mitigate the effect of it.

other items, like children's clothes and footwear, currently exempted of PST will be not affected by the HST either, though that the government could have choose to mitigate the HST effect by a tax credit like in the case of motive fuel, which could have been more favorable to low income families which spend less on garment than rich families.

HST and Housing

Renting

Under the GST rule, rent are exempted, so they will be also under HST rule like it was under PST rule.

Purchasing

Purchase of existing home are exempted of GST (and so will be of HST) while purchase of new home are subject to a GST rate reduced of 36% if the purchase price is below $350 000 (paying effectively a tax rate of 3.2%). Under PST rule, purchase of new home are exempted of tax. Under BC HST rule, up to $200000 of the provincial part of the HST could be refunded (making virtually tax free the purchase of new home under $400 000).

Nevertheless realtor's and home appraisals service will be subject to full HST, whereas they were only subject to GST. It could be considered the change could have little effect on the market:

• Realtor fees are traditionally paid by the seller, and tax increase will only affect its potential benefit (that is assuming the cost of home is fixed by market).
• Cost of Appraisal service can be considered as negligible in a traditional home purchase.

HST effect on new home pricing is expected to be mitigated by suppression of the PST on the construction inputs.