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Backtracking on HST would cost B.C. dearly

Surreal is the only way to describe what's happening on the HST front.

British Columbia could wind up killing its harmonized sales tax and still keep all or part of the $1.6-billion Canadian taxpayers forked over to help the province adjust.

Quebec, meanwhile, is in line to pocket $2.2-billion in compensation for a tax it willingly harmonized nearly two decades ago.

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That's up to $3.8-billion that could be squandered, without a hint of a sound public policy rationale.

Only in Canada.

It's hardly a farfetched scenario. During the election campaign, Prime Minister Stephen Harper pretty much promised Quebec the compensation it waited 16 years to demand.

And in B.C., Premier Christy Clark insists she'll fight to "minimize" the money the province would owe Ottawa if voters defeat the HST in an upcoming mail-in referendum.

The federal NDP campaigned on these absurd demands - that Quebec should get its money, and that B.C. can keep its compensation even if it scraps the HST.

The looming mess in British Columbia is avoidable. The province is three time zones away from Central Canada, but it's behaving like it's on another planet.

No one likes paying taxes. That's a given.

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But harmonizing provincial and federal sales taxes is undeniably the right way to go. It's simple and efficient, and made fair via targeted credits and rebates for low-income earners. The overwhelming weight of economic research shows that a broadly based value-added tax, such as the HST, is the least damaging way for government to raise the revenue it needs for such things as schools, roads and health care. It's why most countries around the world collect the bulk of their revenue this way.

British Columbia endured the pain last year of implementing the new tax, including putting in place new computer systems and shifting thousands of employees over to the federal government. Consumers and businesses also made the costly adjustment, and the world did not end. Businesses now have just one, consistent tax to deal with, cutting compliance costs. And it's all visible, unlike the old provincial sales tax, which many businesses simply buried in the cost of goods.

It's baffling that the province would think of going through this wrenching adjustment all over again, just to satisfy a populist distaste for paying taxes.

Unless someone steps up to the plate and makes a compelling case to British Columbians, the referendum could be lost.

There was an omen in last week's federal election. The NDP's misguided HST promise helped the party grab 12 seats (up from nine) in B.C. and a third of the popular vote. The NDP virtually swept Quebec.

Last week, an independent panel appointed by the B.C. government attempted to inject some balance and sanity into the debate. The panel warned that killing the HST would cost more than half a billion dollars a year and force the province to repay as much as $1.6-billion to Ottawa.

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At the same time, however, the panel acknowledged that some of the promises made about harmonization were probably overhyped. The tax's economic benefits were exaggerated and it hasn't been revenue neutral.

The report estimates that the HST will bring in an extra $820-million a year in 2013-14 and $893-million in 2014-15.

That's hardly a good enough reason to get rid of a tax that so clearly is good public policy.

Balancing out all various budget effects, the report calculates that going back to the PST will cost the province $531-million in lost revenue in 2013-14 and $645-million the following year. With the province running a deficit, that revenue will have to found somewhere else.

Keeping the HST, on the other hand, would cause a modest lift to economic growth, boost exports and create nearly 25,000 jobs by 2020.

Ms. Clark is belatedly offering some possible sweeteners, including rebates and an eventual cut in the HST rate. There are better ways to make the HST more palatable. Ms. Clark might, for example, offer British Columbians the prospect of an income tax break as the revenue collected by the province grows. Or, B.C, could reinvest in improved health care or education.

If Jim Flaherty returns as Finance Minister in Mr. Harper's new cabinet, he should get out to B.C. and start selling the HST. He should make it clear that killing the HST is not a tax break. It will cost the province dearly in lost revenue, squandered adjustment costs and depressed economic growth.

And if Mr. Flaherty and Mr. Harper have any respect for the rest of the country, they should insist B.C. repay every last dime of the $1.6-billion if they foolishly kill the HST.

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About the Author
National Business Correspondent

Barrie McKenna is correspondent and columnist in The Globe and Mail's Ottawa bureau. From 1997 until 2010, he covered Washington from The Globe's bureau in the U.S. capital. During his U.S. posting, he traveled widely, filing stories from more than 30 states. Mr. McKenna has also been a frequent visitor to Japan and South Korea on reporting assignments. More

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