Poor will lose, others will gain a bit with PST

Lower- income families will take a hit, in some cases a big one, when B. C. drops the HST and returns to the PST, says a leading tax analyst who has studied how both these sales taxes affect consumers.

Meanwhile, better- off families will likely feel they’ve come out ahead, although much of their perceived gains — but not all — will be illusory, says Jonathan Rhys Kesselman of Simon Fraser University.

Kesselman did a detailed study of the impact when B. C. went the other way — from PST to HST — and he expects the transition will unfold more or less as the mirror image of what happened then. Prices that went up will now go down, and those that went down will now go up. The prices changed quickly last time, he said, and he expects they’ll do so again.

The impact varies with individual spending, but Kesselman found in his 2011 study, published in the Canadian Public Policy journal, that the HST added about half of one per cent — $ 1 for each $ 200 spent — to overall prices in the province.

When the old tax is re- implemented in April 2012, he expects to see similar savings, although by no means across the board. Some things, like restaurant meals and haircuts, will instantly be seven- per- cent cheaper because they’ll no longer be taxed by the province; the price of other things, like groceries that are tax- free under both systems, will change little or not at all; and some things, products or services that have a lot of inputs subject to PST only, will go up a bit.

Superficially, the two seven percent sales taxes look much the same, except the HST applies to most services and the PST does not. But there’s a key difference beneath the surface that explains the price changes. PST taxes most inputs that businesses need to produce the goods or services they sell, thus driving up the cost of these items. The HST on inputs is rebated, so it applies only when the product is eventually sold.

Complicating any calculation of the impact on consumers are hand- in- glove changes in unrelated tax policies that will cost British Columbians more.

The impact of these changes, outlined in Tuesday’s budget, is greatest for poorer people. Low- income earners were eligible for HST rebates of $ 230 per adult and child. The amount was slowly scaled back on incomes over $ 20,000 for single people and $ 25,000 for families, but wage- earners with several children could still get some benefit at income levels well over $ 50,000 a year.

Using Kesselman’s calculations that prices should now drop by $ 1 for every $ 200 spent, annual spending would have to top $ 184,000 — an impossible sum for a poor family — for savings from lower prices under the PST to equal the $ 920 a year that would be paid to a family of four getting the full rebate.

Better- off families face a smaller hit, all of it on their income tax. The province upped the basic personal exemption from $ 9,373 to $ 11,000 when the HST was introduced, and now they’re reverting to the former level. With provincial income tax rates of five- to- 15 per cent, depending on income level, this means an extra annual cost of $ 80 to $ 240 for B. C. taxpayers.

So if your income is at the level where you’ll pay $ 240 extra in income tax, you’d have to spend — according to Kesselman’s formula — $ 48,000 a year to break even. But then you’d be left with $ 1 extra in your pocket for each $ 200 you spend over and above that.

Kesselman thinks most people will notice the big savings — the cheaper haircuts and restaurant meals, for example — but they’ll overlook the small extra costs even though, added up, they’ll substantially erode the gains.

“So the perception will likely be that many families are better off, but the reality will be that the difference isn’t very significant.”