Executive Vice President of the Canadian Federation of Independent Business
Gordon Campbell’s political miscalculation in 2009 to impose a harmonized sales tax on an unsuspecting public, shortly after an election where promises to the contrary had been made, continues to haunt the province. Whatever one might think of the miscalculation, the provincial sales tax is a seriously out-dated tax that needs to be modernized — a task that today’s politicians are understandably wary of.
The B.C. public might have accepted the need to modernize taxes by moving from the PST to the HST if Campbell’s government had consulted properly, and proposed a lower tax rate to go along with the change. But no politician in their right mind would risk reigniting public fury by suggesting that path now.
With that in mind, last week’s budget announcement that the government will strike a tax competitiveness commission to consult with British Columbians and make recommendations, while making it very clear that HST is not an option, strikes a reasonable and politically courageous compromise.
A tax competitiveness panel with a similar mandate, of which I was a member, made recommendations to the government in the fall of 2012. Although I strongly suspect that the main recommendation will be similar, given the sensitivity of the subject, it makes sense to consult again and get a current read on the situation.
One of the PST’s major flaws is that it is not just levied on final goods but on everything in between, meaning that consumers and businesses pay sales tax more than once on the same goods. If you buy a chair, for example, the manufacturer pays PST on the wood, nails, upholstery and stuffing that go into making it. Some of these tax costs get passed on to consumers. Consumers then pay PST again when they buy the chair. Taxes get paid on the inputs and the final product, with businesses and consumers each absorbing some of those costs.
The PST creates a disincentive to business investment as it is paid on computers, machinery and equipment. This is particularly problematic as it is such investments that help businesses grow, which in turn allows them to create jobs, train employees and increase wages. The tax competitiveness panel found that the return of the PST created a situation where B.C. businesses face the highest effective tax rate on new business investments of all the provinces. It recommended that the province remove the PST on these critical investments, as a good place to start in its tax reform.
The problems don’t stop there. Administering the PST has become a nightmare for business and government alike. One of the more comical examples that a previous minister used to cite was that red raincoats were tax exempt while yellow ones weren’t. Another example, cloth and tailor services are tax exempt unless combined to make tailored suits, in which case they are taxable. At the CFIB, we spend months helping businesses untangle quandaries such as whether to charge PST on pet food containing medication because pet food is exempt but pet medication is not. If you have any remaining doubts that the rules are a complicated mess, pretend you run a small business and try reading the tax bulletin on Personal Tangible Property. I dare you.
Unfortunately, budget surpluses are too small for the province to fix the worst problems with the PST today. A tax commission to make recommendations that can be implemented quickly when surpluses are healthier still makes sense. It would benefit all British Columbians if province could put its sales tax ghosts to rest.