It may be the middle of a hot sleepy summer in some parts, but this year’s relatively cool summer in BC may soon heat up politically, as residents get ready to vote in the HST Referendum on August 5. That very contentious issue, which caused the resignation of long time Premier Gordon Campbell, will result in a shift in the way the province had planned to raise tax revenues. But over time, it could also significantly impact unemployment, as it erodes competitiveness for the province’s business community, in a volatile time.
Today, the harmonized HST is 12% — 5% for the federal portion and 7% for the provincial portion. BC residents have received some relief from the regressive nature of this tax with point of sale rebates, new housing rebates, energy credits, partial rebates for public service bodies, and for individual taxpayers, HST credits on the personal tax return and an increased basic personal amount. In addition, corporate taxes were scheduled to go down.
BC corporations have two tax rates levied on their net income. The lower tax rate, used to compute tax on corporate income under the Small Business Limit, which currently is $500,000, was scheduled to drop from 2.5% to 0% on April 1, 2012.
The higher rate of British Columbia income tax, which applies to all corporate income not eligible for the lower tax rate, has also dropped over the past several years, as follows:
- 10% effective January 1, 2011.
- 10.5% effective January 1, 2010; and
- 11% effective July 1, 2008;
Depending on the outcome of the HST referendum, the province is planning to increase the higher rate of income tax from 10% to 12%, effective January 1, 2012, if voters elect to maintain the HST, but at a rate that will be reduced from 12% to 10%.
Should the August 5 referendum result in a rejection of the HST, the old PST regime will return, at a rate of 12% (5% GST + 7% PST). This will be accompanied by the above scheduled reductions in corporate tax, which should help with competitiveness in a global economy, something BC business will count on to offset the negative effects of the old sales tax structure. This is particularly important as it continues to increase exports to the Chinese market.
Should the voters say no — don’t eliminate the HST — but rather reduce it by 2% in the future, corporations will also lose their tax breaks. The scheduled reduction to the small business rate (0% by 2012) will not go ahead for now and the higher corporate rate will go up by 2% to 12%. . .1% higher than in 2008! However, in this case, businesses will be able to claim input tax credits on HST they have paid to produce goods and services for sale.What’s really at stake in the referendum is the billions the HST is expected to bring in down the line. This is much needed cash for government trying to pay down its deficit and manage costs. Reporting this past July 18 that BC’s deficit was close to a Billion dollars less than forecasted a year ago, Finance Minister Kevin Falcon noted growth in BC’s economy as a key reason for increased revenues, together with savings in health care and of course the new HST revenues, which included money received from Ottawa for implementing the hated tax.
But going forward, things aren’t quite that rosy, according to recent private sector forecasts for the province. According to the Royal Bank’s economic outlook for BC, published in June 2011, “economic activity has lost much of its momentum since the fall. . .British Columbia’s unemployment rate remains above its average of 7.6% in 2010, a clear indication that job prospects have not become any brighter this year.” In fact the same report anticipates unemployment rates of 7.9% in 2011. Further, the rate of population growth weakened in BC, taking it from the second fastest growing city in 2009 to the slowest amongst the provinces west of Ontario. New income tax bases, at least for the time being, are not moving to BC.
Either way, the changes anticipated to the HST in the referendum will negatively affect retained earnings for some business owners in the short term. And, with tax reductions off the table should the HST survives at a lower rate, it’s quite possible, there may be higher prices at the checkout or worse, higher unemployment, too, as part of the fall out.
The department has released its own measure of the outcomes in this presentation: http://www.hstinbc.ca/media/Minister_Presentation.pdf
In a complicated global economic environment, a fragile recovery from the worst financial crisis in modern history is taking place. The net effect of the introduction of the HST in BC is perhaps not completely understood. The Fraser Institute explains this tax is in fact revenue neutral in 2010 to 2012; however, it also points out perhaps the more significant issue: that there is no guarantee it will remain revenue neutral after 2012 under current legislation.
It’s Your Money. Your Life. Jobs are important at all times—but particularly in fragile economic times. They produce tax revenues for governments and financial independence for families. Will a combination of higher taxes, higher interest rates and higher inflation, which may be on the horizon, increase unemployment? Taxpayers in BC may wish to use the referendum as an opportunity to ask this important question of their politicians, together with accountability for tax increases in the future.
Evelyn Jacks is President of the national financial education institute, Knowledge Bureau and best-selling author of 46 books on tax preparation, planning and wealth management, including Essential Tax Facts. Take a free trial of the Real Wealth Management course to think with focus on how to take better control.