Now that July 1st has come and gone, I am definitely hearing progressively more complaints about the new harmonized sales tax (HST) and how it is increasing the prices of everything. While this may be true in some cases, I have found that the impact of this “new” tax has been greatly over estimated. In order to assess this impact, one must first have an understanding of what existed prior to the introduction of the HST (on July 1st 2010) and how this has changed since then.
As the name suggests, the harmonized sales tax is the harmonization of the 5% federal goods and services tax (GST) and 7% British Columbia provincial sales tax (PST). This basically means that instead of having a stand alone PST that is levied on some things that the GST was not (and vice versa), the HST of 12% (5% GST + 7% PST) is now charged on all items that the GST was previously charged on. For over 80% of goods and services, there was no change to the percentage of taxes charged as they were previously subject to both GST & PST and are now subject to the HST. Additionally, goods and services that were not subject to either GST or PST (like basic groceries) remain exempt from the HST.
Conversely, for goods and services that were previously only subject to the GST but not the PST; the sales tax rate applied has increased from 5% to 12%. Examples of items that have been impacted include: newspapers & magazines, hair cuts, dry cleaning, sporting events, eating out at restaurants and new home purchases over $525,000.
While the extra taxes being paid as a result of the new HST are quite visible, the tax savings that occur from the elimination of PST are not as obvious. From an economic standpoint, one of the biggest issues with the PST is that it taxes business inputs. In a nutshell, this means that when a company makes a purchase, they would be forced to pay PST and then when they sell their final good or service, they would charge the end consumer PST again. To illustrate this issue, the example of a hypothetical car dealership will be used. First the maker of car tires pays PST on all of their purchases (including raw materials, computers, machinery etc). Then the tires are sold to the auto manufacturer with PST charged again. When the car is sold to the car dealership PST is charged one more time and lastly, the final consumer pays PST on their dream car . It is also important to note that the final price of the car to the consumer has all of the previous PST amounts embedded in the price. In contrast, the new HST is only charged once which allows businesses to charge less all the way through the delivery chain which would result in a less expensive car in a competitive marketplace.
Although HST is a much more visible tax than the previously combined PST and GST, the final cost to consumers is often much less than it appears. One of the unintended consequences of the old PST is that the increased cost of productivity boosting machinery causes businesses to buy less of it. Less productive companies tend to hire less people and invest less money in British Columbia. To top it all off, there will be significant administrative cost savings from businesses only having to collect and track one tax.
Perhaps this tax is not as bad as it is being made out to be. It is also important to note that Saskatchewan and Manitoba are the only provinces that still charge a separate PST and British Columbia has the lowest HST rate in the country. For a fairly extensive list of items that are subject (and not subject) to the HST, one can go to http://hst.blog.gov.bc.ca/.
Troy Peart B.B.A., CFP, CFA can be emailed at email@example.com. Your questions, comments or suggestions for future articles are encouraged.