TAX NEWS - 2010

British Columbia Tax: Tax has strong support in many sectors of B.C.

Like it or not, the new 12 per cent harmonized sales tax that comes into effect July 1 is good tax policy.

That's the prevailing sentiment from the provincial government, economists and the province's largest industries on the eve of implementation of the tax, which combines the five per cent federal goods and services tax with the seven per cent provincial sales tax.

More than 700,000 British Columbians have signed a petition to kill the HST, which they say is a tax shift from business to the consumer and will have a significant impact on household bottom lines. But support for the tax is solid in many sectors.

"Based on experiences in other jurisdictions, this will be very positive," said John Winter, president of the B.C. Chamber of Commerce. "The bottom line is the job creation that goes with this would suggest it's worth the pain in the end. The net effect of it all will remove a lot of the costs from business in B.C. and enable them to compete."

The provincial government has said since it introduced the idea of an HST last summer that the tax will improve the province's competitiveness and lead to more jobs, higher wages, streamlined business processes and increased investment.

The investment is expected to come 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 per cent. That will change to 16 per cent when the HST is introduced.

The province and economists say the HST will result in the removal of more than $2 billion in costs across the province, because the provincial sales tax companies now pay on their business inputs will be removed.

"I still very much feel that this tax change is the right thing to do and B.C. will be much stronger in the future because of it," said Finance Minister Colin Hansen. He said he is seeing some positive results already.

"I was talking to a company opening a new facility on Vancouver Island [that] plans to hire 200 people. They figured they would save about $500,000 a year because of the HST and would not be opening the facility without it," he said.

Hansen said the HST will save the forest industry an estimated $140 million a year in costs and will help that sector rebound sooner than expected.

"We could see some impact immediately with companies investing in equipment," he said. "The fact is the HST will save [resource industries] billions, and that will translate into jobs."

But that is cold comfort to consumers, who claim the new tax will increase their costs on everyday items. The HST will be applied to everything the GST covered, including items previously exempt from provincial tax.

It also does little for people who are struggling right now, argues Alison Smith, a single mother who was laid off from her provincial government job last fall.

"I'm not necessarily opposed to the HST, but we have to be smart about it," she said. "We need to focus on getting people back into the workforce, getting the economy back in order before bringing in something like the HST," she said.

Herbert Schuetze, an economics professor at the University of Victoria, said anger from the public is understandable.

"There are two issues: People felt lied to, and the other is the shift to a broad-based tax for the province in some sense is a sellout of many of the things we have said that are important in this province," he said.

For instance, healthy modes of transportation such as bicycles are now subject to a seven per cent increase in tax, as are alternative health therapies and vitamins. "The reality is this is an increase in tax for individuals," Schuetze said. "Whether we like it or not, maybe that's what's needed in our current condition, but let's be honest about that, it's an increase in tax."

Still, Schuetze said this is the right way to go.

"From my personal view, I think the type of taxation we're talking about is more efficient," he said. Taxation tends to distort activity and limit transactions in any marketplace, he said. A more balanced tax across that market will mean less distortion.

"It's more efficient to tax everything at the same rate so we don't distort relative prices and you don't get a decline in activity," he said. It is better than having your labour taxed -- also known as an increase in personal income tax, he said.