Harmonized tax will promote increased investment in B.C.

Over the past year, B.C. businesses (both small and large) have become increasingly supportive of the harmonized sales tax (HST) as their understanding of it grows and they begin to realize its benefits.

Indeed, support from the business community has grown to the point that business associations once opposed to the HST are now vocal supporters.

The HST, however, will need much broader support to withstand this summer’s referendum.

Unfortunately, many British Columbians are not yet convinced the HST is a better tax than the PST/GST system it replaced.

This, of course, is perfectly understandable because the costs of the HST to consumers are visible and immediate, while the benefits are less noticeable and accrue over a longer period.

To understand why the HST is a better tax than the PST/GST, British Columbians need to be aware of the single biggest problem with the old PST: it applied to business inputs – including much of the machinery, equipment, technology (i.e. computers, software) and materials that businesses bought – as well as many of the goods and services purchased by consumers. It therefore increased the cost of investment.

The HST, on the other hand, allows B.C. businesses to claim a refund on all the sales tax they pay on business inputs, which lowers the cost of investing.

Past experience in Canada with the HST suggests it will lead to more investment. After three Atlantic provinces moved from the PST/GST to the HST in 1997, investment in machinery and equipment (per person) rose by more than 12% above the trend in the years after the reform.

It is not yet known exactly how much investment will increase in B.C. as a result of the HST (it will take a few years before good data on business investment is available for 2010 and 2011). But one thing is certain: replacing the PST/GST with the HST will provide long-lasting economic benefits.

As business investment increases, job creation will follow along with increased economic growth and higher levels of productivity.

The independent panel on the HST has estimated that the move from the PST/GST to HST will increase B.C.’s economy by $2.5 billion by 2020. This translates into about $480 more income per British Columbian (or $830 more per family).

That is unequivocally good news for British Columbians.

Yet many HST supporters are left wondering why the HST hasn’t garnered stronger public support.

Setting aside the public’s anger about the way the HST was introduced, many are likely hesitant to show support because they believe the HST shifts the tax burden from businesses to consumers.

Although the government used to collect around 40% of PST revenue from businesses through the taxation of business inputs, it was average British Columbians who bore the burden as businesses passed on the tax in the form of higher prices. That is, the tax on business inputs under the PST was largely hidden in the price of the goods and services we bought.

Since business inputs are now exempt from sales tax under the HST, competitive pressures in most industries will cause businesses to pass on most of the savings to consumers. In fact, new evidence shows that businesses have already begun to do just that.

The independent panel’s report shows that while the HST modestly increased B.C.’s overall price level immediately after being introduced, B.C.’s inflation rate is now close to the national average.

This summer, British Columbians have an important decision to make. Those interested in increasing investment in the province, which will ultimately benefit British Columbians through higher rates of economic growth, more opportunities and a higher standard of living, would do well to help ensure the HST remains in place.