BC Progress Board Supports Harmonized Sales Tax

VANCOUVER — As with any significant tax change, some will prefer the new system and some the old. As you make up your mind about the relative costs and benefits of harmonization try to keep a few things in mind.

BC's average productivity growth since 1981 was one-third of Canada's and below every other province's. Investment intensity, a measure used to separate investment growth due to favourable economic conditions from that due to the incentive for businesses to invest, shows that BC has a long-standing problem due to the province's investment structure.

Our recent report Investment in British Columbia: Current Realities and the Way Forward describes BC's below average productivity performance as well as underlying causes and possible solutions. The most important recommendation is to replace PST with a value-added tax, preferably harmonized with the federal Goods and Services Tax.

Services and some goods will be subject to more tax and relative consumer prices will change although they may not increase significantly on the whole. There are several tools available to offset the impact on consumers. All of those identified by the BC Progress Board are incorporated in the proposed HST: less than full input tax credits; special treatment for new housing; some items excluded from the provincial portion of the tax; an enhanced tax credit; and, federal transition funding.

Although the HST has critics, no one is claiming that harmonization is bad for the province as a whole. The diffuse benefits from increased investment, productivity and increased living standards will benefit us all - even those who currently prefer the PST.

The current PST stands out as a particular disincentive to invest in BC. In 2008, the PST accounted for more than one-third of BC's Marginal Effective Tax Rate (METR), a broad measure of the tax burden a business faces on new investment. The proposed HST will decrease BC's METR by 40 percent and will do more to stimulate investment than complete abolition of the province's general corporate income tax would. Evidence from the Atlantic provinces suggests that the HST could close 70 percent of the investment intensity gap between BC and the national average.

In its simplest terms, productivity and productivity growth determine how much a jurisdiction can produce and consume given finite resources. For a business, surviving in competitive markets means being as productive as possible; that is, producing as much output per unit of capital and labour as possible. For an individual worker, productivity levels ultimately determine the wage they can demand in a market. And at a broad societal level, productivity growth holds the key to funding critical public services such as infrastructure, health care, education and other social services that are fundamental to a high quality of life.

Productivity growth is held up as the single most important determinant of a jurisdiction's standard of living because it is the only GDP driver with no upper limit. Others, like employment, have natural boundaries which limit their contribution. For example, last year 74 percent of BC's working age population was employed. If BC's employment rate were to grow as it did between 2001 and 2007, we would see an increase in real GDP per capita. However, employment as a GDP growth driver is limited because the rate cannot exceed 100 percent.

Replacing the Provincial Sales Tax (PST) with the Harmonized Sales Tax (HST) removes a large impediment to investment. More investment brings in new technology and fuels the innovation which sustains ongoing productivity improvements. As long as BC continues to innovate and improve productivity, we will reap improvements in our standard of living.

It is not obvious that our province is gradually slipping in measures of productivity because BC has many advantages that have allowed it to prosper in spite of the disincentive of a high effective tax rate on investment. By moving to a Harmonized Sales Tax and removing a large impediment to investment and productivity growth we are more likely to see better productivity performance and the eventual result of increased living standards.

-30-

Media Contact:
Gerry Martin,
Chair, BC Progress Board
(604) 775-2116