This year, British Columbians will celebrate Tax Freedom Day, the day when individuals start working for themselves after paying off the total tax bill imposed on them by all levels of government, on Monday, June 6, two days later than in 2010, according to the Fraser Institute's annual Tax Freedom Day calculations.
But if voters kill the Harmonized Sales Tax (HST) in the upcoming referendum, B.C. families will likely be celebrating a later Tax Freedom Day in years to come, warns Niels Veldhuis, Fraser Institute senior economist and co-author of Canadians Celebrate Tax Freedom Day (complete report: http://www.fraserinstitute.org/research-news/display.aspx?id=17626).
"If voters decide to keep the HST, Premier Christy Clark's government has promised to reduce the provincial portion of the HST rate from seven per cent to five per cent. The average B.C. family receives a $750 tax cut from the reduced HST package, meaning Tax Freedom Day would arrive on June 3 rather than June 6," Veldhuis said in a news release. "While it might not seem like much, it's three more days we'd be working for ourselves and not the government."
Tax Freedom Day is a simple, easy-to-understand measure of the total tax burden imposed on Canadian families by government. If Canadians had to pay all taxes up front, they would have to pay each and every dollar they earned to governments prior to Tax Freedom Day.
To illustrate the impact the decision from the upcoming HST referendum could have on Tax Freedom Day in British Columbia, Veldhuis offers two scenarios:
Keep the HST
If voters decide to keep the HST, Clark's government has promised to reduce the provincial portion of the HST rate from seven per cent to six per cent on July 1, 2012, and to five per cent on July 1, 2014.
While it is impossible to accurately forecast incomes and spending patterns three years from now, it is useful to compare the amount of sales taxes we will pay this year with a 12 per cent HST to what we would have paid with a 10 per cent HST.
The average British Columbian family would pay $953 less in sales taxes with a 10 per cent HST compared to a 12 per cent HST.
To help offset the loss in revenue, the Clark government will temporarily raise the general corporate income tax rate to 12 per cent from 10 per cent on Jan. 1, 2012 and postpone the small business income tax elimination that was planned for April 1, 2012 until the budget is balanced.
While the rhetoric surrounding these increases is that businesses should help pay for the HST reduction, the reality is that businesses do not bear the burden of these taxes - people do. The cost of business taxation is ultimately passed onto ordinary B.C. families in the form of higher prices, lower wages, and/or lower returns on investment.
Our estimates show an extra $196 will be passed on to the average B.C. family as a result of higher business taxes.
Overall, however, the average B.C. family receives a $750 tax cut from the reduced HST package. And Tax Freedom Day would have arrived on June 3 rather than June 6.
Kill the HST and reinstate the 12 per cent PST+GST
If the majority of British Columbians vote against the HST, the province will shift back to the seven per cent PST and five per cent GST, and the average family will pay slightly less in sales taxes. Specifically, the average family will pay $257 less in sales taxes if the PST/GST system is reinstated.
However, the provincial government also introduced personal income tax reductions and a new tax credit when it introduced the HST in 2010. Specifically, the basic personal income tax exemption was increased to $11,000 in 2010 from $9,373 in 2009, which reduces the amount of tax individuals pay, and a new B.C. HST credit ($230 per family member) was introduced to help roughly 1.1 million low and modest income British Columbians.
If these income tax reductions are rescinded, the average family would see their income taxes increase by $183.
Overall, the average family's tax bill would be $73 lower under the PST/GST system than it is currently. And while any tax reduction is welcome when the average B.C. family's tax bill is $36,600, a $73 reduction is negligible and represents a decrease of just 0.2 per cent.
Returning to the PST/GST will result in exactly the same Tax Freedom Day we're currently celebrating, since the move would have virtually no impact on the total tax bill paid by the average family.
In addition, shifting back to the PST will have a very negative impact on business investment and development. B.C. workers will ultimately suffer from lost productivity resulting in reduced wage growth and fewer employment opportunities.
"The rhetoric from opponents of the HST has distorted and misrepresented the impact of the tax reform. Reducing the HST rate by two points and raising the corporate income tax rate by two points is far better for B.C. families than readopting the PST/GST system," Veldhuis said. "A vote for the HST is a vote for an earlier Tax Freedom Day."
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