Friday, June 17, 2011

De-spinning the HST numbers

It’s not easy to sort the HST facts from the spinning by both sides in the tax debate.
Start with Finance Minister Kevin Falcon’s claim that going back to the PST would blow a $3 billion hole in B.C.’s fiscal plan over this year and the next three.
That’s a stretch. The analysis by the independent panel that reviewed the HST’s impact suggests a much smaller hit.
This column will be a heavy on numbers. But numbers matter.
The referendum will result in one of two options: A return to the old PST/GST taxes; or staying with the HST, with promised future rate reductions, some new rebates, corporate tax increases and cancellation of the plan to eliminate the small business tax.
Going back to the PST would bring some costs. The federal government took over sales tax administration when the HST was introduced; the province would have to spend $20 million to re-establish the PST collection office and about $35 million a year to keep it operating, the panel found.
Axing the tax could result in reduced economic growth, reducing provincial revenues by $80 million a year, it estimated.
And the panel noted the province would have to pay back $1.6 billion the federal government put up to encourage adoption of the new tax.
The panel — including former Alberta finance minister Jim DInning and ex-B.C. auditor general George Morfitt — judged the impact of that would be an extra $85 million a year in interest costs because of the increased provincial debt.
And, based on the panel’s analysis, the PST would deliver about $610 million a year less in tax revenue for government than the HST, even if reduced from 12 per cent to 10 per cent. (That, of course, means a saving for families.)
But the panel also noted that the government would save about $441 million a year because it could cancel the rebates and tax reductions brought into cushion the HST’s impact.
All in, based on the panel’s analysis, going back to the PST would cost the government about $362 million a year, mainly because families would pay less tax.
Falcon’s estimate is much higher. The main reason is that he concludes, based on preliminary advice from the province’s comptroller general, that the $1.6 billion would have to be repaid immediately and counted as an expense.
Accounting debates aside, the panel offers a more realistic view. Provincial taxpayers wouldn’t suddenly pony up $1.6 billion; they would pay the long-term interest costs.
The claims about impacts on families are just as muddled.
Christy Clark says the revised HST would see taxpayers pay less than under the PST.
That would eventually be true. But not until 2014. In the meantime, individuals and families would be paying more in sales taxes than under the PST.
Based on the panel’s analysis, individuals and families are paying an extra $1.3 billion in sales taxes this year because of the HST’s wider reach. (The portion of a typical families’ spending subject to provincial sales tax jumped by almost 60 per cent under the HST, the panel found.)
Even with the first rate reduction, from 12 to 11 per cent on July 1, 2012, families would still pay $690 million more in sales taxes in the next fiscal year under the HST. The following year, they would pay $430 million more than under the PST.
It’s not until the following fiscal year — 2014/15 — and another one-point cut in the rate, that families would pay less than they would have under the HST - about $330 million less. That amount would increase in future years.
So families would have spent an extra $2.5 billion in sales taxes over three years before they started seeing lower taxes than under the HST. (Rebates to low-income seniors and all families with children would reduce that by about $200 million.)
There are other reasons for voting to keep or kill the HST. But understanding the numbers is a a good starting point.
Footnote: A problem with any look at the numbers is that the government did not ask the independent panel to report on its estimates after announcing the HST rate cut and corporate tax increases. Given the government’s dismal record in providing accurate HST information, that raises serious doubts. Check for more on these numbers.

Tuesday, June 14, 2011

Falcon heads to New York to explain two years of chaos

It's not surprising that Finance Minister Kevin Falcon went to New York to reassure big lenders about the province's books.
The last two years have been a fiscal gong show. The government's erratic policy stumbles are the kind of behaviour that makes lenders and bond rating agencies edgy.
Start with the government's botched deficit forecast in the 2009 campaign budget. The deficit, then premier Gordon Campbell vowed in the May election campaign, would not exceed $495 million.
Four months later, the government said the deficit would actually be $2.8 billion.
That's a spectacular failure, the kind that makes lenders wonder what else the government is messing up.
Then, of course, there is the HST. The Liberals ruled it out during the election campaign and then, two months later, announced the introduction of the new tax.
Leave aside the pros and cons for a moment. There is no debate that lenders and investors like stability in tax policy.
A surprise introduction of a major tax change, especially one that had been rejected months earlier, does not increase confidence. And especially when the government concedes it made the tax change without any economic analysis of its impact. (Falcon acknowledges cabinet ministers were heavily focused on the chance to get $1.6 billion from Ottawa to reduce the deficit problem.)
Then things got more erratic.
As public anger about the HST increased, Campbell went on television in November and announced a 15-per-cent income tax cut. That would knock about $1 billion a year off provincial revenues; there was no clear plan for dealing with the shortfall.
Again, a well-considered, affordable tax cut would likely find favour with rating agencies and lenders. This looked like an impulsive effort to shore up a failing government. That impression was confirmed a few weeks later, when Campbell quit and the Liberals said they weren't going ahead with the promised tax cut.
If you're watching this from a New York investment fund or bank, you are likely getting nervous about the competence and stability of the government.
How much more chaotic could things get?
Quite a bit more, it turned out. Because the government last month announced more surprise tax changes. The HST would be reduced in two steps if it survived the referendum, Premier Christy Clark said.
She had rejected that during her leadership campaign. It would be akin to bribing people with their own money and leave the province short of revenue for health care and other needed services, she said.
And the government would raise corporate taxes 20 per cent, said Clark, reversing past cuts - the most recent less than six months ago. (NDP leader Adrian Dix proposed the same increase during his campaign. George Abbott said the idea represented the "leading age of 18-century socialism." Mike de Jong said an increase would be "chasing jobs and investment away.")
You can debate all these individual changes, their benefits and costs.
But taken together, they paint a picture of an erratic, incompetent government that doesn't have a coherent tax policy.
Add to that the government's inability to provide accurate information on the HST. It claimed the tax would result in 113,000 new jobs by 2020; a credible independent panel report commissioned by the government estimated 24,400. It said the tax was revenue-neutral; the panel found it was a tax increase; it said a middle-income family would pay $100 more a year under the HST; the panel said it would be five times that much.
No wonder Falcon needed to head to New York. The last two years of lurching, incoherent tax policy would likely alarm any lender or bond rating agency.
Clark should also be wondering if the last two years have alarmed B.C. voters as well. Because if so, a fall election could be highly risky for a party that has always claimed to offer stable, consistent administration.
Footnote: The latest Angus Reid poll found 56 per cent of decided voters would vote yes to get rid of the HST. It also found 40 per cent of those surveyed considered Clark credible on the tax; 35 per cent considered Dix credible; and 47 per cent thought Bill Vander Zalm credible (he's not). The media came in at 37 per cent (sigh).