HST vote a move in the wrong direction

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Kevin Milligan is Associate Professor of Economics at the University of British Columbia

After more than two years of public discussion, the results are in: B.C. will leave the HST behind as of March 31, 2013, and revert to the two tax PST-GST system. I was a volunteer advisor to the 'pro-HST' side of the referendum, and so it is perhaps not surprising that I am disappointed by this outcome. However, we must now cast our attention forward. What does reverting to the PST-GST mean for the future of B.C.'s economy?

First, we are moving to a system that is less efficient. The cost of investing in B.C.'s economy will increase. Economist Jack Mintz calculates that the effective tax rate on investment fell by about a third with the onset of tax harmonization; that decrease is now going to be reversed. This will lead to lower investment, which means slower growth and lower quality employment. While we need not exaggerate the impact of this change, this is not a move in the right direction. The B.C. economy will resemble a runner in a race with a ten pound weight in her pocket, when her competitors are not so burdened.

Second, B.C. will likely have to pay back the $1.6-billion in transition funding that was received from the federal government. Finance Minister Jim Flaherty has stated he expects full repayment. The final negotiated position may change, but Mr. Flaherty is constrained by the distaste of voters in other provinces to pay money to B.C. for a tax it no longer has. While not a major burden for an economy the size of B.C., $1.6-billion is still a lot of money to give up.

Finally, the transition will be complex and difficult. Most people understand the costs of setting up a tax collection bureau in Victoria and companies reinstating accounting systems. However, the larger problems are in the transition rules. Many contracts and transactions will span the transition date, making the application of the HST very difficult. See here for a short description of some of the rules that governed the transition to the HST in 2010. Here is a 31-page document from the Canada Revenue Agency outlining some details for the transition to the HST for Ontario -- just for the housing industry.

Why is transition so difficult? Imagine a house under construction during the transition period. The builder will have bought some inputs before and some after the transition date. The contract might be signed before, but effective after, the transition date. How does HST apply in these kinds of situations? Myself, I don't know. But I do know clear rules must be established and laid out well in advance. These complicated rules both divert economic resources from productive uses and also inhibit investment because of the confusion they entail. Such transition costs might be worth paying when you are moving to a better tax system, but taking on these transition costs to move to a worse system is a tough prospect to face.

Many on the anti-HST side of the debate have been rejoicing that the HST is now dead. Unfortunately for all of us, like Monty Python's parrot, it's not quite dead yet. The economic costs of this choice will be with B.C. for years to come.