After a lengthy debate and public referendum, citizens of British Columbia have made their choice: HST will be eliminated as of March 31, 2013, with the province slated to revert to the PST/GST system in its place.

Economists across BC were overwhelmingly pro-HST, claiming the system was more efficient, cost-effective and better for the economy overall than its alternative.

Despite the general consensus of opinion among economists, the HST referendum results showed the majority of BC residents favoured leaving the tax behind:

"Are you in favour of extinguishing the HST (Harmonized Sales Tax) and reinstating the PST (Provincial Sales Tax) in conjunction with the GST (Goods and Services Tax)?" 

• Yes: 54.73 per cent
• No: 45.27 per cent

Small business in the face of HST elimination

The removal of HST from the province will produce some significant economic impacts and adjustments. The first that comes to mind is the $1.6 billion the federal government gave the province for adopting the HST, which now needs to be paid back. Others include a less favourable environment for investment and a less competitive export economy, among other things.

Small businesses can also expect to feel the impacts of the HST elimination.

According to the HSTinBC.ca Independent Panel Report, though the HST had detrimental impacts on SMBs in certain sectors, particularly the restaurant industry, it held some definite benefits for small businesses in general:

• HST made it cheaper to produce goods and services, helping overall sales and exports;
• HST made bookkeeping simpler and cheaper for small businesses;
• HST helped make businesses more competitive; and
• Overall, HST decreased the costs of operating a small business.

Under the HST system, an average of $150 million per year was saved in administrative costs for small businesses in British Columbia, savings which will no longer be possible when the province reverts to the PST/GST.

"Small businesses will now have to comply with two taxes," says Ted Mallett, VP and Chief Economist of the Canadian Federation of Independent Business (CFIB). "This will mean [not only] higher costs but higher uncertainty, as they will have to deal with two sets of auditors."
 
Administrative costs are not the only costs that will increase with the elimination of the HST. Small businesses will also have to worry about increasing expenses for producing goods or offering services, as well as an overall increase in operating costs.

"It's certainly not a good thing for small businesses," says Dr. Paul Beaudry, Professor of Economics at UBC and Canada Research Chair in Macroeconomics. "Value added taxes [like HST] make small businesses able to deduct their taxes on anything they buy, so the HST was a much better tax for business."

However, there are businesses in some sectors that will be happy to see the HST go. Under the HST, restaurants were required to charge 12 per cent HST, which many felt was negatively impacting business. But under the PST/GST system they are only required to charge 5 per cent GST.

But despite the benefits the PST/GST will hold for certain businesses, both Mallett and Beaudry believe that overall, eliminating the HST will not help the economy prosper.

"We are disappointed with the results from the referendum," says Mallett. "[Eliminating the HST] will see increased costs and a higher impact on the BC economy in general."

According to Beaudry, a significant negative aspect of the PST/GST system is that taxes accumulate throughout the production process.

"That's how a sales tax works: each time that something is used there's re-tax on it. So things get really explosive in taxes as you use things many times through the production chain," says Beaudry.

"A value added tax doesn't do that, it only taxes at the end person. In any of the intermediate steps it actually gets deductions throughout, and that's why it's a much more efficient tax. It really taxes only once, and it's a better tax system overall to bring everything into value added taxes, which is how most of the countries in the world work."

For more information on the potential impacts and benefits of eliminating the HST in BC, consult HSTinBC.ca's Independent Panel Report. To access detailed referendum results, visit Elections BC.

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