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Fraser Inst. says why the HST is good for B.C.

2009-10-23 21:35 ET - Street Wire

by Stockwatch Business Reporter

According to the Fraser Institute, the harmonized sales tax (HST) will not cost consumers as much as they think. The cost of most goods and services will go down, some will go up a little bit while some others will remain exempt from tax. On Friday, the institute sponsored a presentation at the Hyatt Regency Hotel titled "Bottom line: Is the HST good for B.C.?" for a modest turnout of 35 paying guests. The two speakers, Niels Veldhuis, the institute's director of fiscal policy, and Jock Finlayson, the Business Council of B.C.'s executive vice-president of policy, agree that the HST will allow businesses to save money, which competition will dictate they pass on to consumers, all while the government is moving toward a more efficient tax system.

Misperceptions

Mr. Finlayson addressed possible concerns about the "sticker shock" whereby B.C. residents fear some items will increase in cost by 7 per cent. It is true that some items such as clothing will increase in price, but not nearly as much as consumers fear, because of the tax savings businesses will realize under the HST system. He also notes that any items already exempt from GST will be exempt from HST. This includes groceries, exports, medical devices and pharmaceuticals. Also, the $5 levies on tires and batteries will be done away with, as will the clean energy levy and the 8 per cent hotel room tax will decrease to 2 per cent.

Mr. Veldhuis points out that HST is not a new concept. The Atlantic provinces implemented the tax over 10 years ago and have had success with it. Studies conducted by Professor Michael Smart of the University of Toronto show that the Atlantic provinces benefited from average prices falling 0.3 per cent after implementing the HST. Professor Smart's work also proved that per capita investment rose by over 11 per cent in the Atlantic provinces compared with non-HST provinces, and investment in machinery and equipment increased by over 12 per cent.

Then Mr. Finlayson addressed buying houses, which will only affect buyers of bigger homes "like the $2-million home that Niels [Veldhuis] lives in," a comment that elicited two chuckles from the small audience. (Mr. Veldhuis later confirmed for anyone who did not know him that he does not live in a $2-million home.) The HST will not apply to preowned house purchases or houses under $400,000, and as for new houses purchased for more than $400,000, the buyer will receive a $20,000 credit against the HST. Mr. Veldhuis added that for a home that costs between $500,000 and $600,000, buyers will see an increase of only 0.6 per cent, while buyers of homes valued at $900,000 would see an increase of almost 3 per cent.

For labour intensive industries such as tourism, Mr. Finlayson concedes the HST may lead to higher service charges, but he optimistically suggests at some point the government could adapt a policy to offset higher prices. "There will be growing pains and tax hiccups," Mr. Finlayson cautions, "but this is absolutely the right way to go."

Another benefit of HST, according to Mr. Finlayson and Mr. Veldhuis, is that the B.C. government will exit the sales tax policy business and the responsibility of collecting taxes will fall solely to the Canada Revenue Agency. This issue prompted an audience member to inquire about the future employment of the provincial tax auditors. Mr. Finlayson suspects the CRA will probably employ them to help administer the HST, but his answer was more speculation than confirmation. According to Mr. Veldhuis, the B.C. government will save the $150-million annual cost of administering the PST. Mr. Veldhuis says that businesses will no longer have to adhere to two tax bases which have a host of different rules and require businesses that collect taxes to operate with two sets of sales records and two sets of compliance and reporting requirements. By July, 2010, tax compliance will fall under one policy.

Another massive incentive for B.C. to take on the HST is the sweetener payment of $1.6-billion that the federal government will give the province for the transition. The province, which is running a deficit, will not be as profligate as Ontario with its money. Ontario will implement the HST policy on the same day as B.C. Its residents will each get a cheque for $1,000, while the more sensible B.C. government will use the money to buttress the overall financial position.

Mr. Veldhuis, also an advocate of Alberta adopting the HST, says HST is sensible but there is still work to do in terms of tax policies. He calls for a reduction in personal income tax, a reduction in corporate tax and an increase in the threshold for small business tax rate to $1-million from $500,000.

When questioned about the effect on lower income households, Mr. Veldhuis said the province will provide a low income tax credit of up to $230 and he says wages will ultimately rise as a result of increased business investment. One further question addressed a possible effect on the stock market. Mr. Finlayson confidently said that a policy change by a province is unlikely to have an impact on the stock market.

Lastly, the speakers addressed the benefits the HST will have on new investment in businesses. Since PST applies to both business inputs and final goods and services, doing away with it eliminates taxes for businesses on equipment and machinery. Mr. Veldhuis says that removing a tax on business inputs, which accounts for roughly 40 per cent of PST revenue, will not only lower the cost for businesses to invest, but it will encourage them to upgrade machinery and equipment. He adds that this will lead to improved production which in turn leads to higher wages. Another significant benefit, according to the economist, is that the marginal effective tax rate on new business investment will decrease by about 10 per cent. These benefits will help solve what Mr. Finlayson deems B.C.'s three fundamental economic challenges: not enough investment in business; low productivity and slow growth relative to the rest of Canada; and a weak export base.

Reader Comments - Comments are open and unmoderated, although libelous remarks, including names, may be deleted. Opinions expressed do not necessarily reflect the views of Stockwatch.
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While I agree that the HST is probably a good idea, I am so pleased to know that only 35 people showed for their last event. It's about time people stopped tuning in to these Fraser Institute wack-jobs and their fascist propoganda machine. Their work is tantamount to a Fox News broadcast and it actually mkes me skeptical of the HST that they support it, though I think it's a good idea.

Posted by Richard @ 2009-10-24 18:42

There was a day when I actually thought these quasi-intellectual dopes held some slight relevance. I've grown much from those days of utter stupid ignorance. These clowns SHOULD (but won't) look in the mirror.

Pfffft!

Posted by Fraser Institute WhackerDoodles @ 2009-10-24 20:24

Now that the government has already removed the straw from our brick making process.......they also want us now, to do it while we are naked ........... only an assanine and stupid, Conservative Fraser Institue would find this normal!

Posted by peter @ 2009-10-25 04:58

Where was Mr. Finlayson born? As a hired hand on the Bush ranch?

Posted by Sam @ 2009-10-25 05:02

Right now the PST is a deduction by industry in calculating taxable income. Any benefit that BC's extractive industries get through the HST will be passed on to the export customers and buyers of their products so the beneficiaries of the HST will be the Chinese and Japanese customers who dictate to the likes of Teck et al what (benchmark) prices they will pay for products such as BC coal. In the mean time, BC comsumers will bear the full impact of the HST and to compensate for their reduced purchasing power, will demand higher wages from industry. If there is an HST benefit to BC industry and businesses, it will be short lived. For others, such as myself, my competitors in Alberta will enjoy a 7% cost advantage over me. I either have to cut my fees or incorporate in Alberta to compete on an equal footing.

Posted by Cyril @ 2009-10-25 15:06

What does the federal government get from all this obviously it's not to create harmony or it's a failure out of the starting block...

Posted by RichieBoy @ 2009-10-26 08:34

The Feds will claim that the HST is more efficient and some Provinces have been able to cut their PST. In BC the PST reduction is only 0.5% while the cost of living due to the HST is expected to increase by 1.5%. Because our economy is export based, the beneficiaries of the supposed decreased costs to business and industry will be the export customers of such products and services. This includes tourists who will get an HST rebate at the border.

Posted by Cyril @ 2009-10-26 10:38

"Their work is tantamount to a Fox News broadcast..."

My goodness! Where would we be without Fox? These guys broke the Acorn story *last year*....while the fringe media decided to ignore it. Fox exposed Van Jones as the radical marxist that he is. Fox exposed Anita Dunne - another marxist. Fox exposed Frank Lloyd - yet *another* marxist who thinks that Hugo Chavez is the end all and be all for 'social democracy'.

And now we have Obama the Hesitant taking personal aim at Fox because they (and only they) choose to question his radical and destructive agenda.

We would be balls on lucky to have a Fox network up here in Canada.

Posted by Crusader @ 2009-10-26 11:02

'The following story illustrates the plight of the independent artisan under the new regime. A Berlin locksmith, whom we shall call Herr Z., had a small but long-established shop. His father had owned it before him, and his grandfather before that. He had a modest but very steady trade in the neighborhood, consisting mostly of contracts to keep the locks of apartment houses in order. He had never engaged in politics.

'About two years ago another locksmith, Herr Y., came into the district and opened a shop directly opposite Z.'s. Y. was an old Party member and also belonged to the S.S. He was a regular attendant at Party functions, and many of the neighbors suspected him of being connected with the Gestapo, the dreaded Secret State Police. It was remarkable how suddenly any neighborly gathering would break up when Y. joined it.

'Owing to his being an outsider and to the aversion he aroused in the neighborhood, Y.'s business did not prosper particularly at first. Then, gradually, a change set in, which was brought about in the following way. Each of the apartment houses with which Z. enjoyed a repair contract had a Nazi housewatcher or Blockwalter. These are reliable Party members whose job it is to keep an eye on everyone in their apartment house, or their city block, and to report any person suspected of being a "dangerous element." Y. knew the local Party secretary well and, in due time, denounced Z. as a "dangerous element," constantly criticizing the system and stirring up his customers against it. As a result, the local Party secretary found it necessary "in the interest of the State" to influence the Nazi superintendents to transfer all their repair business to his friend Y.'

That's fascism, folks! [From The Vampire Economy by Gunter Riemann, 1939. For the record, Hr Riemann was a Marxist.]

Posted by Daniel M. Ryan @ 2009-10-26 12:11

Do these "economic experts" really believe this sophistry they propound? Do they really believe business will pass along the savings realized? I think not. The PST should be abolished to level the playing field since the major beneficiaries are, as Cyril has correctly identified, those foreign nations purchasing our exports. Someone once said that if all the "economists" were laid end-to-end they would not reach a conclusion. I agree.

Posted by N. McKay @ 2009-10-26 12:54

quote: Someone once said that if all the "economists" were laid end-to-end they would not reach a conclusion. I agree.

Peter Schiff is someone who has had it right for three years. Buy gold. Keep your exposure to fiat currency to a minmium. Shun socialism. Shun big government.

Posted by Phat Deano @ 2009-10-26 13:03

why cant they harmonise the tax and leave things the way they are no 1.6 billion to the provinces no check to the people and stop causing inflation and continue living the way we are living have you seen the prices of car reduced no

Posted by frank ramchuck @ 2009-10-26 17:24

To me, the Canadian dream is for every family to be able to own their own home.

From my point of view, Let’s look ahead to July 1, 2010

On this day, every home owner in B.C. who sells their home (whether new or used) will now have to pay 12% HST on all real estate commissions.

Now consider,.........In British Columbia where the cost of housing is literally the highest in all of Canada, you are out with your wife and children looking for a house to buy.

You have 2 choices. Both houses are the same size and are on the same size lot.

A. The first house is brand spanking new and has a sale price of $550,000.

If you buy it, in addition, you will pay $9,000 in Provincial Property Transfer Taxes.

As well, with the 12 % HST now in effect, you now will also have to pay an additional $66,000 less, as I understand it, a rebate of $20,000.

Therefore your total cost for this new house will be $605,000.

B. The second house is a used 5 year old house and has a sale price of $550,000.

If you buy it, in addition, you will pay $9,000 in Provincial Property Transfer Taxes.

Therefore, your total cost for this used house will be $559,000.

What affect do you think the HST will have on a house buyer’s decision making given these 2 choices?

To me, Buyers will flock to buying used homes. That will put upwards pressure on the price of used homes especially in the Vancouver, Victoria and Kelowna areas where most of the population is located.

Now keep in mind that B.C. already has the highest house prices in all of Canada.

Perhaps the HST will provide some benefits to other parts of the B.C. business community, but it certainly does put significant further financial barriers in the way of families wanting to buy their new home.

I am having trouble seeing how the HST will benefit the consumer in this instance.

Note: There are some that may say that when new house is being built, a developer saves a considerable amount of money due to the new HST savings and that the savings will be passed along to the Buyer of the new home.

I am having trouble with this theory. Housing prices are arrived at by supply and demand. Home Owners in general try to sell their homes at the highest prices that the market will bear. I have considerable concern that this HST savings the Seller has might well turn into profit for the Seller and an additional expense for the Buyer.

Posted by John @ 2009-10-27 03:20

where did the fraser institute get that there will only be a 0.6% increase in 500,000-600,000 houses? i think that number is way out to lunch.

Posted by jimmie @ 2009-10-27 12:18

I have no choice but to implement this tax. How else am I going to pay for all those upgrades to the infrastructure and inevitable cost overruns that go hand in hand with hosting such a prestigious event as the winter olympics?

You people are so ungrateful! I have to leave some kind of legacy when I leave office don't I?

Posted by Gordon The Grifter @ 2009-10-27 18:58

This is just another cash grab that this government will implement. When was the last time they did something for the people? Its just another revenue stream, more tax = money out of people's pockets. Way to go idiots, Gud Contry Kanada.

Posted by Mark @ 2009-10-28 10:08

"To me, the Canadian dream is for every family to be able to own their own home..."

Only if every Canadian works hard and works hard under a system that does not over tax production and wealth. Then I am sure a fair amount of *worthy* Canadians will be able to afford to buy into the idea of real estate ownership.

The other way might be difficult because - luckily for us - we do not have corrupt organizations like ACORN up here to brow-beat the banks into giving second and third class citizens free money for free houses.

Posted by Phat Man @ 2009-10-29 11:29

Peter Schiff is a tool

Posted by Bonerjam @ 2009-10-29 14:32

When a Conservative National government starts proporting any other taxes in conjunction with the provinces, one must realize completely, like the sunshining in your eyes on a beautiful morning, that our largest trading partner the U.S of A, have just kicked our doormat government out of bed to make the coffee. In reality this is just the appetizer, then both of these vermin entities, will come back with the full course meal, a new Free Trade Agreement, totally weighted in favour of the U.S of A......the act of selling Canada, and all of it's citizens down the river, is a national pastime with this big Federal mental midget leader.

Posted by Randy @ 2009-11-01 06:50

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