Backgrounders
What the media missed: the CD Howe Report and HST
There has been much media speculation and commentary regarding a document recently obtained through a Freedom of Information request. While much of this focus has been on the implementation of HST, the Chamber is concerned with media reports which reference a CD Howe Report discussing harmonization’s short-term negative impact on the economy.
Frankly, it is the Chambers opinion that these reports are irresponsible and only serve to contribute to the sustained level of misinformation and inaccuracy currently present in the public debate on HST. As such, the Chamber believes it is important to set the record straight on both the CD Howe report and research on the impacts of HST.
CD Howe Report - Growth-Orientated Sales Tax Reform for Ontario
Important distinctions
Many media stories have painted the CD Howe paper as either a report on BC HST or as directly applicable to the HST in BC. This is disingenuous to say the least for the following reasons:
- The CD Howe report was published in 2008 and therefore does not reflect the actual HST model that is in place in both Ontario and BC.
- Further to this, the central model which shows harmonization’s negative impact on GDP is calculated under an 8% tax rate with no recognition of the exemptions and rebates businesses in both provinces receive as a result of the HST.
- Perhaps most importantly, the CD Howe report in no way discusses the implications of HST in BC, it only focuses on Ontario.
The actual impact of a 7% tax rate.
Media reports of HST’s negative impact on the economy, as discussed above, are entirely dependent on the assessment of the HST at a tax rate of 8%. When the assessment of HST at a 7% rate are made the result is very different, as clearly demonstrated by Appendix 2: “Further Results of the report”.
This section models harmonization in Ontario at a 7% tax rate and clearly states that the 7% rate would “yield estimated positive GDP effects right from the initial year.” This model also demonstrates that an 8% rate would result in a 0.25% drop in real GDP for the first year, followed by a 0.22% drop in year two. However, a 7% tax rate would result in a 0.04% increase in the real GDP for both the first 2 years.
Actual Impact of HST in BC
Media commentary has also suggested that the benefits of HST are long term, while the negative impacts are immediate. While it is true that the small, short-term inflationary impact of HST is felt immediately after implementation, this is negligible for most consumers given the very low inflation rate currently enjoyed in Canada. Indeed, a report by Don Drummond of TD Bank Economics entitled “The Impact of Sales Tax Harmonization in Ontario and BC on Canadian Inflation” shows that while the increased range of goods and services subject to a sales tax under HST will lead to an increase in prices for the consumer, “it will not be as much as many fear.” The reason for this is that only 21% of the goods and services consumed in BC will face an increase in the tax charged, the remaining 80% of all goods and services will only see a downward pressure on their prices. As such, this report estimates that the total inflationary impact of HST will be a 0.7% increase in the Consumer Price Index (CPI).
Research in other jurisdictions also shows that the positive benefits of harmonization will flow relatively quickly while the full benefits in terms of productivity and living standards will take slightly longer because capital investment will take time to positively impact output.
Indeed, if we look at another CD Howe report “Lessons in Harmony: What Experience in the Atlantic Provinces Shows About the Benefits of a Harmonized Sales Tax”, we see that very soon after harmonization these provinces saw investment per capita, particularly in machinery and equipment, rise significantly. While this is temporary, these investments will bring significant benefits to businesses and workers through increased capital stock and productivity, the single largest determinate of increased living standards and wages.
Also, the Lessons in Harmony report clearly demonstrated that the relationship between taxes and prices are such that the savings realized by businesses led to a corresponding drop in many pre-tax prices for a range of goods and services. In fact, the CPI in the Atlantic provinces actually fell after harmonization (this will not be the case in BC since the Atlantic provinces also reduced their rates considerably to reach the 13% combined rate, BC’s rate remains the same at 12%)
The most authoritative research done on the actual impacts of the HST in BC remains the paper by Jack Mintz, “British Columbia’s Harmonized Sales Tax: A Giant Leap in the Provinces Competitiveness.” It clearly shows that the benefits to BC’s economy will be significant. Mintz’s analysis shows that when the full benefits of the HST and other tax reductions are realized BC will see an increase in investment of $14 billion, which translates into an increase of 141,000 jobs. It is important to note that all the analysis shows that there are short, medium and long term benefits to HST which will build a stronger economy, better jobs and stronger communities.
If you have any further questions regarding this information, or on the Chamber’s position on the HST, please do not hesitate to contact me and I will be happy to help.
Regards,
Jon Garson
Vice President, Policy Development
jgarson@bcchamber.org
604 638 8113
