We Paid Record Sales Taxes This Year

Despite finance minister Gary Collins' recent announcement  of an immediate half-percent cut to the retail sales tax, that tax will generate this year more than $4 billion for the provincial treasury - the highest ever.

Having delivered income tax cuts to wealthier British Columbians, the B.C. Liberals have come to depend heavily on "regressive" taxes. Much more heavily, in fact, that the previous government.

(Sources: 2004 British Columbia Financial and Economic Review, p. 74; and Province of British Columbia 1st Quarterly Report 2004-05, p. 43. Does not calculate revenue lost as a result of October sales tax reduction.)

The government's first quarterly report for fiscal 2004-05, released in mid-September, showed sales tax receipts topping $4.2 billion, a $55 million increase over the original budget estimate in February, and up $879 million over the past five years. Collins' half-point reduction will cost the government slightly more than $100 million over the remainder of the fiscal period.

Income tax plummeted

Officially called the "Social Service Tax," the sales tax in recent years has become an increasingly important source of government revenue. While B.C.'s total haul from all tax sources over the past five years has grown by a mere 6.9 percent, and personal income tax revenue plummeted by a surprising 12.7 percent, sales tax receipts have soared by a whopping 26.4 percent. (The calculations are based on the first quarterly report.)

Personal income and retail sales taxes are B.C.'s two largest sources of taxation revenue, together generating about two-thirds of yearly tax receipts. Taxes contribute about half of Victoria's annual income, and the other half is derived from Crown corporations, federal government transfers, resource revenues, Medical Services Plan premiums, fines and licences, investments, and the sale of assets and services.

B.C.’s Tax Sources, 1999-2000 to 2004-05
Tax source	1999-2000	2004-2005	$ difference	% difference
Income tax	$5,824	$5,080	($744)	(12.7)
Sales tax	3,332	4,211	879	26.4
Other taxes	4,591	5,399	808	17.6
Total tax income	13,747	14,690	943	6.9

For the last quarter-century or so, sales tax revenue has been slightly more than half that provided by the personal income tax. For example, twenty-five years ago (in fiscal 1979-80), sales tax revenue was 54 percent of income tax receipts. Five years ago (in fiscal 1999-2000), it was a near-identical 57 percent.

The Alberta levy lasted just a year, however, as a backbench revolt in the Social Credit caucus of Premier William Aberhart forced repeal of the statute. Thanks largely to the discovery of oil at Leduc in 1947, Alberta today is the only province without a sales tax.

But over the past couple of years, primarily as a result of the B.C. Liberal government's decision to slash personal income taxes while hiking the sales tax, the latter has quickly gained on the former as a source of government revenue. In 2002-03 sales tax revenue was 91 percent of income tax receipts, and government forecasts show it staying above 80 percent in the current and next two fiscal years.

There were early concerns over the constitutionality of provincial sales taxes. The British North America Act permitted Ottawa to enact any and all forms of taxation, but restricted the provinces to "direct" taxes. ("Direct" taxes are those directly paid by, and therefore seen by, each individual. They include taxes on income and property. "Indirect" taxes are those which are hidden from, but ultimately paid by, the consumer; i.e. tariffs or customs duties included in the price of a retail item.)

The provision arose when tariffs were the main source of government revenue, and from the belief of Canada's Fathers of Confederation that provincial governments would be reluctant to enact direct taxes. They thought the provinces would be wary of incurring the wrath of taxpayers, and therefore disinclined to embark on expensive projects or programs. This was true for more than a half-century following Confederation, but the Great Depression and subsequent expansion of government services forced the provinces to find new sources of revenue, no matter how unpopular.

Progressive vs. regressive

To address both constitutional and political concerns, therefore, the provinces assigned a variety of names to the sales tax: in Alberta it was the "Ultimate Purchasers Tax"; in Saskatchewan, the "Education and Hospitalization Tax"; and in B.C., the "Social Security and Municipal Aid Tax."

As suggested by the name of the statute, local governments initially were to receive one-third of B.C.'s sales tax. This provision was eliminated in 1955 when Victoria came up with a new formula to provide grants to municipal governments.

Ups and downs

This is noteworthy because the income tax is regarded as a "progressive" levy, and the sales tax, "regressive." That is, income tax rates rise with an individual's personal income, while the sales tax is applied at a uniform rate on each consumer, regardless of income or wealth. The millionaire and the college student each pays the same tax rate on their purchases.

At first B.C.'s sales tax was set at three percent on each retail sale. The rate was increased to five percent in 1954 by WAC Bennett, the then-new Social Credit premier who sought additional revenue to offset his government's abolition of hospital insurance premiums.

The B.C. sales tax initially covered all retail purchases.

The B.C. Liberals' roll-back in income tax rates and boost to the sales tax rate, therefore, served to reduce the tax burden on high-income British Columbians while at the same time increasing the taxes paid by residents with lower incomes.

But in 1962, Bennett removed the levy from school textbooks, and four years later exempted restaurant meals, reading materials, children's clothing and footwear, school supplies and, interestingly, soft drinks and candy. Many new exemptions and applications (for example, on legal fees) have been introduced over the intervening years.

Indeed, the B.C. Liberal government has raised several "regressive" levies besides the sales tax, the most notable being the 50 percent raise in Medical Service Plan premiums. Victoria's MSP revenues have skyrocketed from $867 million to $1.4 billion over the past five years.

The five percent rate held for more than two decades. Then, in 1976, W.A.C. Bennett's son, Bill, boosted the rate to seven percent, claiming it was necessary to pay down the deficit left by the defeated NDP administration of Dave Barrett. Two years later, after Ottawa promised additional federal transfers, the rate was reversed from seven to five percent, excluding liquor which remained at the higher rate.

In 1979, in advance of a provincial election held later that year, the sales tax was cut to four percent. But economic recession in the early 1980s halted the downward trend and it was raised first from four to six percent, and then back to seven percent. A short-lived retrenchment followed when a new Socred premier, Bill Vander Zalm, reduced the rate from seven to six percent in 1987. Vander Zalm also pledged a further cut to five percent at an unspecified future date.

That further cut never occurred. Social Credit was defeated in 1991, succeeded by a New Democratic Party government led by Mike Harcourt. Despite its historic opposition to "regressive" taxes, the NDP in its first budget lifted the sales tax from six to seven percent, and it remained at that level for the duration of the New Democrats' two terms in government. (The NDP also disappointed more than a few of its supporters by retaining the regressive MSP premiums.)

Evolution of the sales tax

In synch with election

Alberta, in 1936, was the first Canadian province to introduce a sales tax. Saskatchewan followed in 1937, and Quebec in 1940. B.C. enacted its sales tax in 1948, New Brunwick and Newfoundland did so in 1950, and soon all the remaining provinces were in the field.

In 2001, Gordon Campbell and his newly-elected B.C. Liberal administration introduced a dramatic 25 percent cut to personal income taxes and slashed a variety of business taxes by about $700 million annually. The following spring, desperate for additional monies to offset lost revenue, the Campbell government raised the sales tax to 7.5 percent.

On October 20, 2004, in the midst of a provincial by-election and mere months away from a scheduled general election, the B.C. Liberals announced their half-point increase would be rolled back and the seven percent rate restored.

At $4 billion a year, B.C.'s Social Service tax provides about 15 percent of total government revenues.

Will McMartin a former Socred advisor and political consultant, is a member of CBC Radio's "Early Edition" political panel and writes a regular column for The Tyee.