A tale of two HSTs: B.C. HSt could be 15% by the time the Government roles it out


Gordon Campbell's B.C. Liberal government will implement a 12 % harmonized sales tax July 1 2010(could be 15%) , a move defended by Finance Minister Colin Hansen, right.

Atlantic Canada's experience with the harmonized sales tax -- which actually reduced taxes for most people -- might not be the ideal model for British Columbians who face the spectre of the HST hitting their wallets next July.

As it faces a public outcry over the 12% tax, which combines the 7% which may become 10% provincial sales tax with the 5% GST, the B.C. government has pointed to the Maritime provinces, where the HST is linked to an increase in capital investment and a general trend to lower prices for consumer goods.

But according to economists and business owners there, the circumstances surrounding the 1997 introduction of the 15% HST, now 13 %t, were very different from what B.C. faces.

While the HST means consumers here will pay 7% more for things that were previously PST exempt, such as restaurant meals and hotel rooms, in Atlantic Canada the HST lowered the overall tax paid, since the combined PST and GST was 19% in Newfoundland and 18.7 % in Nova Scotia and New Brunswick.

Leanne Hachey, vice-president of the Canadian Federation of Independent Business Atlantic Canada, said another major difference was there was plenty of consultation with industry and business groups before the tax was introduced -- consultation that never happened here.

"We were able to survey our members in advance to raise possible issues and concerns and bring them to government," she said.

"That's very different to what we're seeing now in Ontario and B.C. "We're still hopeful there will be time to raise red flags and make proposals to make the deal more palatable." In B.C., the tourism and hospitality industry and homebuilders are outraged by the move to the HST.

Anne Freiss, who owns Canadvac, a tour operator in Chester, N.S., said the B.C. tourism industry might have good reason to fear the tax.

While she is a firm believer in the HST's benefits and would like to see it adopted across the country, Freiss said B.C.'s tourism industry has for, the most part, been exempt from PST and now faces a seven per cent increase across the board.

"That wasn't the case here," she said, noting the Atlantic Canada industry had been subject to provincial sales tax and actually caught a break with the HST. "Tourists are price sensitive, and [the increase in B.C.] comes at a very bad time, when tourism is down." Lars Osberg, economics research professor at Dalhousie University in Halifax, said the differences probably explain why there wasn't the same kind of outrage over the HST's introduction in Atlantic Canada in 1997.

"Our general response would probably be what's the problem out there?" Osberg quipped when told of the public outcry in B.C. over the tax.

Homebuilders also appear to have a legitimate beef with the new tax.

A C.D. Howe Institute report on the HST in the Atlantic provinces, often cited by B.C.'s Finance Ministry, noted prices for consumer goods in the those provinces tended to fall when the tax was introduced.

But it also pointed out that shelter costs increased.

Various media outlets reported housing starts were down anywhere from four to 12 % in some Atlantic regions following the tax's introduction.

Still, B.C. should be able to take some lessons from the Atlantic experience, said Mary Webb, senior economist with Scotiabank.

"It is the one model to study, and generally they found it quite difficult at the beginning, but they are quite happy they have shifted." Consumers noticed manufacturers quickly passed on savings as the cost of production was cut when sales tax was removed during the manufacturing process, she said.

And small business owners should also reap a benefit, said Yama Younis, owner of Abe's Furniture in Mahone Bay, N.S.

"Honestly, it was much better for us," he said, noting the HST cut the paperwork in half and simplified dealings with government.

Younis said there was some sticker shock early on for consumers, but people quickly got used to the tax.

In B.C., the government is banking on an increase in investment as a result of the HST's reduction of the marginal effective tax rate on new business investment.

Currently, new investment on capital is taxed at a rate of 27%t. That will drop to 16 % when the HST is introduced.

The C.D. Howe report noted annual machinery and equipment investment in the Atlantic provinces that adopted the HST rose 12.2 % above trend levels in the years following the tax reform.

That would certainly be music to the ears of B.C.'s government, assuming it can hear the tune above the cries of outrage over the HST.

The forest industry is among the sectors looking to the HST to subsidize their companies. Who else gains from the tax?