Sunday, February 23, 2014

The Mystique of the Harmonized Sales Tax

The Mystique of the Harmonized Sales Tax

By Sora Kazesawa
The Daily Magi
September 11, 2063

The Harmonized Sales Tax (HST) is a consumption tax in Canada. It is used in provinces where both the federal Goods and Services Tax (GST) and the regional Provincial Sales Tax (PST) have been combined into a single value added sales tax.

The HST is in effect in five of the ten Canadian provinces: Ontario, New Brunswick, Newfoundland and Labrador, Nova Scotia and Prince Edward Island. On April 1, 2013, British Columbia abandoned the HST and reverted to the GST/PST system and Prince Edward Island adopted the HST. The HST is collected by the Canada Revenue Agency, which remits the appropriate amounts to the participating provinces. The HST may differ across these five provinces, as each province will set its own PST rates within the HST.

The introduction of the HST changes the PST for these provinces from a cascading tax system, which has been abandoned by most economies throughout the world, to a value added tax like the GST.

To help maintain revenue neutrality of total taxes on individuals, the Canadian government (for the GST) and the participating provincial governments have accompanied the change from a cascading tax to a value-add tax with a reduction in income taxes, and instituted direct transfer payments (refundable tax credits) to lower-income groups. The federal government provides a refundable "GST Credit" of up to $248 per adult and $130 per child to low income people for 2009-10. Provinces offer similar adjustments, such as Newfoundland and Labrador providing a refundable tax credit of up to $40 per adult and $60 for each child. British Columbia’s low income credit is mailed out to 1.1 million British Columbians every three months and amounts to up to $230 annually per individual.

Despite the benefits advocated by those in favour of moving from a cascading tax to a value added tax, in some places it has shown to be unpopular with the general public, as shown in the British Columbia sales tax referendum, 2011 which ultimately decided that the HST should revert to the GST/PST system.

A study, conducted by the CD Howe Institute before announcements to exempt low value purchases, found B.C. and Ontario's HST likely revenue neutral. A separate report from the Roger Martin task force on the economy found the HST would lower taxes overall as “increased revenue from the harmonized sales tax is matched by reductions in corporate and personal taxes and by tax credits. The effect is revenue loss.” The Globe and Mail reporting on the study found that the "Ontario government will actually lose revenue." In a report by David Murrell, Ph. D, Senior Fellow at the Canadian Centre for Policy Studies, the net impact of the tax was expected to be "modestly progressive" for the poorest households to upper-middle-income families while increasing taxes by $320 in British Columbia and $290 in Ontario.

Public opinion however holds negative feelings towards the HST with an Ipsos Reid poll showing vast majority of British Columbians (82%) and Ontarians (74%) oppose their provincial government’s plans to harmonize the sales tax. Only 39% of the public believes the HST would be beneficial for businesses whereas the Task Force on Competitiveness, Productivity and Economic Progress found costs will decrease for small business as they recover sales taxes they have to pay on goods and services they purchase and will lower their administrative costs. Additionally, only 10% of the public agree that the move will help to create more jobs. A study by Jack Mintz of the University of Calgary School of Public Policy found that the HST and a drop in the corporate tax rate will create almost 600,000 new jobs over the next ten years.

Former British Columbia Premier Bill Vander Zalm launched a petition against the HST in that province. On August 11, 2010, Elections BC informed him that the campaign had succeeded in collecting the signatures of more than 10% of registered voters in each of the province's 85 ridings by 5 July 2010. The success of the petition could require the provincial government to hold a referendum on the tax. Elections BC was expected to make a formal announcement but they declined to do so and have chosen not to move forward in the process until the courts have decided on a case, brought by local business groups, challenging the petition. On Monday, July 5, 2010, Bill Vander Zalm, Chis Delaney and Bill Tieleman announced that they had launched their own lawsuit, a constitutional challenge against the HST because it was never passed into law by the British Columbia's provincial legislature. On August 20, 2010, Chief Justice Robert J. Bauman ruled a petition opposing British Columbia's controversial harmonized sales tax was valid. This decision will result in sending the issue back to the provincial legislature. Bauman said Elections BC was correct when it approved the petition on August 11.

The approval of the petition to recall the HST in British Columbia paved the way for a referendum that allowed British Columbians to decide the fate of the tax system. Elections BC conducted the referendum via mail-in ballot, allowing registered voters to send in their decision in regards to the HST. The British Columbia sales tax referendum, 2011 was conducted throughout June and July 2011.

The Question on the ballot was: Are you in favour of extinguishing the HST (Harmonized Sales Tax) and reinstating the PST (Provincial Sales Tax) in conjunction with the GST (Goods and Services Tax)? Yes or No.

The ruling BC Liberals had campaigned in favour of the HST since its introduction the previous year, noting it would be too costly to return to the original GST/PST system. In April 2011, British Columbia Premier Christy Clark announced a province-wide engagement initiative to listen to British Columbians' suggestions to "fix" the HST.

In May 2011, the Minister of Finance Kevin Falcon announced that if British Columbians vote to keep the HST the rate will drop by 1% on July 1, 2012 and another point in 2014. This will bring the overall rate to 10%. The Government also committed to mailing onetime transition payments of $175 per child to families with children and $175 for low and middle income seniors. A month later, the federal government passed legislation to "formalize and give legal force to the reductions in the rate of the provincial component of the HST in British Columbia".

On August 26, 2011, the results of the referendum were revealed by Elections BC, with 55% of 1.6 million voters in favour of abolishing the HST. The BC Liberals revealed a plan to reinstate the GST/PST system within 18 months, with a target date of March 31, 2013. British Columbia paid back $1.6 billion to the federal government in order to opt out of the HST program.

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