The province is heading back in time, at least in terms of its tax regime.
As of April 1, B.C. will slip back into a two-tiered tax system as the provincial sales tax returns, replacing the contentious harmonized sales tax that blended the PST with the federal goods and services tax when it was enacted in 2010.
Some will see the transition as a pleasant trip down memory lane, given consumers will get a break on some goods and services, while others will see it as a regressive move that makes the province less attractive to investers and less competitive than jurisdictions that have stuck with a harmonized tax system.
Regardless of perspective, the playing field is about to change.
“The most obvious changes will be the ones where the PST had specific exemptions on particular goods — that will create a checkerboard of winners and losers,” said Herbert Schuetze, professor of economics at the University of Victoria.
Schuetze said the return to the PST means consumers will now get a seven per cent break on things like dining out, bicycles, gym memberships and vitamins — items that were exempt from PST, but subject to the broader harmonized tax system.
But he cautioned that the province is shifting back to a tax system that taxes inputs in the production of goods, which could mean price increases as those cost hikes are passed onto consumers.
Schuetze said the other hit relates to B.C.’s competitiveness.
“[In switching to] the HST in 2010, the government at the time was responding to a shift to the HST in Ontario and other provinces which put their firms at a competitive advantage to B.C.,” he said. “A firm choosing to locate between B.C. and Ontario looks at being able to purchase capital goods in Ontario and not paying tax on them, while in B.C., that issue will now be back on the table again.”
Helmut Pastrick, chief economist with Central 1 Credit Union, said in the short-term, the switch back to PST could have a positive impact on the overall economy, but it won’t last.
“Short-term, it’s a bit of a lift to economic growth — disposable income may increase somewhat, and lower costs for restaurant meals, haircuts and the like potentially increases the demand for those services, and as a result, consumer spending may increase,” he said. “But that benefit over the longer term tends to diminish because of weaker export performance and investment spending.”
Pastrick said manufacturers will no longer get tax credits for the PST they pay, and as they absorb those costs, they become less competitive and have a higher cost structure.
Under the PST, manufacturers pay taxes on each stage as a product is transformed from raw material to finished goods. For a lumber company, for instance, PST is paid on everything from the raw lumber to the cost of transporting the finished product to its destination.
That “cascading” PST — paying tax on a tax — is embedded in the cost of the finished product to consumers.
Under the HST, the tax was paid only once, at the end of the process, which in theory, reduced the final cost.
“Over 10 or 20 years, this tax change will shift the B.C. economy to be more consumption-oriented and less investment- and export-oriented,” he said.
The province’s large-scale manufacturers, who applauded the switch to the HST in 2010 — saying it would save all industries about $2 billion annually — are now dreading the switch back.
“The immediate effect is a $140-million hit to the [forest industry] bottom line,” said Rick Jeffery, president of the Coast Forest Products Association. “It increases our costs and we have no ability to recoup those costs because we sell internationally and can’t charge PST.”
Jeffery said the industry, which has only recently returned to profitability after a decade of struggling under the burden of a high Canadian dollar, the softwood lumber dispute and depressed markets, will now hope to find savings to offset increased costs due to the new tax regime.
“We are looking to work with government now and in the future to find ways to streamline regulatory costs and things like that to recoup costs,” he said.
Small businesses, meanwhile, are split on the return to the PST.
While many, especially in the hospitality industry, expect consumer spending to increase, the switchover is creating its own burden.
According to Mike Klassen, director of provincial affairs for the Canadian Federation of Independent Business, it will cost a small business $3,000 on average to switch over, including loss of productivity, time and software and hardware upgrades.
“What I’ve been hearing from a bunch of our members is they are saying they wish they could stay with the HST as it’s so much easier for them, but let’s face it, the horse has left the barn,” he said.
That may be why many businesses have been dragging their feet preparing for April 1.
With less than two weeks to go before the deadline, only 55,000 of more than 100,000 businesses had registered to collect the PST, despite seminars offered throughout B.C. to explain the process. The province also sent out 116,493 reminders to register and responded to more than 40,000 calls from business for information.
“From a retailer or business perspective, it’s more work and more costs,” said Darlene Hollstein, general manager of the Bay Centre and chairwoman of the Greater Victoria Chamber of Commerce. “For consumers, it’s a good thing, though they won’t really see much of a change.”
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