HST Wasn't Fixed: Politics Trump Good Policy

This is no way to make tax policy. Wednesday's proposed reforms to the HST provide yet more evidence that what we really need is a Fair Tax Commission -- a full public engagement exercise in which the entire tax regime is on the table, and people can deliberate on how we want to raise the revenues we need.

There are elements of the latest reform package I like (which I'll get to below), but overall the government's proposed "bold fix" is a classic case of politics trumping good policy.

What's my beef with the "fix"?

In promising to lower the HST by two percentage points (from 10 per cent to 12 per cent over the next three years), and in sending families cheques this year of $175 per child under 18 regardless of household income, the government is proposing to spend a great deal of money on people who don't need it.

True, a two percentage point reduction in the HST will benefit everyone, but the biggest dollar savings would go to the wealthiest households (as they spend the most on goods and services). Likewise, wealthy families with children under 18 will get cheques this year that they will hardly notice in their household budgets (even though, collectively, these cheques will cost the public treasury a lot), while low and modest income people without children get nothing. This is not a wise use of public funds -- it makes much more sense to target money to the individuals and households who really need the help. (Ironically, this is what the government is proposing to do for seniors -- offering additional rebates only to low and modest income seniors -- but for political reasons they've chosen a different approach for everyone else.)

The government is proposing to partially pay for this change by increasing the corporate income tax from 10 per cent to 12 per cent (meaning, returning the corporate tax rate to its 2008 level). Now I'm all for that. But Finance Minister Kevin Falcon has made a point of emphasizing he sees this change as "temporary."

Digging a $1.3 billion hole

But here's the bigger problem: Cutting the HST by two percentage points is very expensive -- about $1.7 billion in lost revenue per year once fully implemented. In contrast, increasing the corporate income tax rate to 12 per cent will only recoup about $400 million. That would leave a hole in the budget of about $1.3 billion. So this "fix" would mean the HST is no longer revenue neutral, but revenue negative, and would have to be paid for in either increased debt or (more likely) cuts to public services and programs. (The government is also proposing to delay further reductions in the small business tax rate, which would save about another $300 million, but again, the minister has emphasized that this delay is temporary.)

In short, Premier Clark has more or less done the same thing Gordon Campbell tried just before announcing his resignation; namely, seeking to win the public over with a promise of more tax cuts, the budget consequences (and money for public services) be damned.

A much better (and cheaper) fix, as I recently wrote here, would have been to keep the HST, expand the low-income HST credit, and fully pay for this expansion with increases in corporate income taxes. But again, what we really need is a full Fair Tax Commission, in which we deliberate over the role of a value-added sales tax within the overall tax system (which would serve us so much better than a referendum on such a narrow question).

A few positives

That said, embedded in the government's proposed "fix" are some positive developments that need to be recognized.

The campaigners against the HST should take some satisfaction from the fact that they made the government say "uncle." The government was forced to admit that the HST shifted too much onto consumers and too much off corporations.

More importantly, the government has now acknowledged that we can increase corporate income taxes and the sky will not fall. It is no small irony that when Adrian Dix proposed during the NDP leadership race that corporate income taxes be returned to their 2008 level, he was accused by government representatives and media pundits of being a "class warrior." Yet now Christy Clark has proposed doing just that (and even gone a step further with a proposed delay to planned reductions in the small business tax rate).

And another rather delicious irony: those corporate income taxes reductions since 2008 were part of the carbon tax's revenue recycling regime. Meaning, if the government did actually increase the corporate income tax, they would have to amend their carbon tax legislation, which requires that the tax be revenue neutral. Again, I'm all for that. The Canadian Centre for Policy Alternatives has long said that making the carbon tax revenue neutral (and giving big tax cuts to business) made little sense, and that the carbon tax income should be partially used to fund other climate initiatives. So nice to know the new premier is now ready to break with revenue neutrality there.