By Miro Cernetig, Vancouver Sun columnist August 11, 2009

Nothing’s more deadly in politics, short of a corruption scandal, than introducing a sales tax.

Just ask Brian Mulroney about the GST. It was a good policy, one that generated massive budget surpluses for the country, but tainted him for life.

Premier Gordon Campbell, a keen student of Canadian politics, knows the unpopularity that befalls a leader seen as a tax-and-spender. It’s why you never heard much about the dreaded HST — harmonized sales tax — in the run-up to or during the May provincial election.

But within the government, five months before the provincial election was called, the premier was presented with a full report listing the economic benefits and political downsides if he introduced the HST. It came from the B.C. Progress Board, essentially the premier’s policy think-tank, in a report called Investment British Columbia: Current realities and the way forward.

It pretty much outlined the policy we have today and

predicted a public backlash if the government introduced the HST, which will put a 12-per-cent sales tax on just about everything you buy.

“Consumers would face higher taxes on a wide range of services and new housing currently exempt from the PST,” the report concluded. “Assuming a rate of seven per cent for the provincial portion of a harmonized sales tax, the total federal-plus-provincial sales tax rate would rise from five per cent [the current GST rate] to 12 per cent on items such as restaurant meals, home heating, basic cable and telephone, and new condo units.

“In the short and medium term, lower-income British Columbians could see declines in real income as consumer prices rise. Public opposition to such a shift would be a substantial concern to policy-makers.”

The report informed the Liberal government it was a no-brainer to push through the harmonized sales tax and that it should alter its opposition to the HST: “The evidence favours shifting towards a value-added tax. While the adoption of a value-added tax with a wider base would not only be more efficient and fair, it would also alter relative consumer prices, but it may not significantly increase them on the whole.

As such, the BC Competition Council recommendation [in 2006] not to replace the PST with a value-added sales tax due to, the potential effect on retail prices is debatable.”

In fact, the government was told an HST would not only attract investment to the province, it would actually supply more revenue. “In fact,” the authors wrote, “[with a 12 per cent HST] tax revenue would have been $224 million higher in British Columbia in 2002, with lower revenues from construction inputs (down $519 million), other intermediate inputs (down $516 million), capital (down $351 million), and government (down $15 million). These lower revenues would have been more than offset by additional revenues from a wider taxation base including additional goods (up $353 million) and services (up $722 million) as well as new taxes on housing (up $549 million).”

If you want to attract badly needed capital to B.C., the report left no doubt what the right policy for the premier must be: “PST harmonization, or replacement of the PST with a value-added tax possibly similar to the GST, will provide long-term benefits to British Columbia in the form of higher investment that, over time, will lead to a larger capital stock and higher labour productivity. In the short and medium run there will be transitional costs, but these could be minimized through careful implementation.

“Replacing the PST with a provincial value-added tax is by far the best way to increase investment in BC.”

But there was another downside, one that had some political consequences. For a lot of British Columbians, the HST wasn’t entirely a great deal in the short run, the report acknowledged: “Of course, the legal and visible burden of taxation would fall increasingly on households rather than businesses. Yet, the distributional shifts following from such a reform, while mildly regressive, would not be large.”

So there you have it. Five months before an election, a blueprint for the HST was circulating inside the Liberal government. In fact, it was posted on the Internet for anyone to see.

So, the premier had a dilemma.

As a policy-maker, he had an easy choice. The federal government and many other provinces have embraced the HST. Economists — and staff he trusted — agreed the HST would increase the productivity of the B.C. and Canadian economy and attract capital investment.

But as a politician, and a man who knows how razor-thin victories often are in B.C. elections, Premier Campbell and his advisers faced another tactical problem. It would be political suicide to jump onto the HST five months before a provincial election.

And they were right. Since announcing the HST, the Liberal government’s popularity has plummeted 12 percentage points in a recent poll, to just 34 per cent. It suggests that with an HST in his platform, the Liberals would not likely have won a third term in power.

So was it dishonourable to keep this major policy shift quiet? Is it a scandal?

No. It’s just the craft — and craftiness — of politics.

mcernetig@vancouversun.com
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