The Fraser Institute

The Fraser Institute

June 21, 2010 09:05 ET

The Fraser Institute: BC's Low and Middle-Income Families Will Pay Less Taxes Under the HST; Harmonization Will Have No Impact on BC's Tax Freedom Day

VANCOUVER, BRITISH COLUMBIA--(Marketwire - June 21, 2010) - Most low and middle-income families in BC will see their total tax bill decrease under a harmonized sales tax (HST), according to new research by the Fraser Institute, Canada's leading public policy think tank.

The Institute also found that the HST, which combines the current provincial sales tax (PST) with the federal goods and services tax (GST) and is set for implementation on July 1, does not change the date of BC's Tax Freedom Day.

"Under the HST, BC's tax system becomes slightly more progressive, due to the reductions in provincial income taxes and the new HST credit. This means most families with lower incomes will end up paying less tax overall, while most families with high incomes will pay slightly more," said Niels Veldhuis, Fraser Institute senior economist and co-author of the report, The Impact of the HST on British Columbian Families.

"The leaders of the campaign to halt the HST are distorting and exaggerating the impact of the harmonized sales tax. The truth is, low income families will be better off under the HST."

Effect of the HST by Family Income

When the provincial government introduced its HST legislation, it also increased the basic personal income tax exemption to $11,000, which reduces the amount of tax individuals pay, and introduced an HST credit for low and modest income families.

As a result, even though low and mid-income families will pay slightly more in sales taxes, the increases are more than offset by income tax reductions and the HST credit, leaving most low and middle-income families in BC with a smaller total tax bill in 2011 under the HST than under the PST.

Overall, families with incomes between $20,000 and $40,000 in 2011 will see an average tax reduction of $411; families with incomes between $40,000 and $60,000 will see their total tax bill decrease by an average of $159; while families with income between $60,000 and $80,000 will see an average tax reduction of $34.

Families in upper income groups will see a slight increase in their total tax bill; an average increase of $65 for families with incomes between $80,000 and $100,000; an average increase of $117 for families with income between $100,000 and $120,000; and an average increase of $167 for families with income between $120,000 and $140,000. However, these increases are negligible given the total taxes paid by families in these income groups. For example, the $167 average increase in the total tax bill for families with income between $120,000 and $140,000 represents an increase of just 0.3 per cent.

Effect of the HST on BC's Tax Freedom Day

Each year, the Fraser Institute calculates Tax Freedom Day, a clear and easy-to-understand representation of the amount of tax the average family must pay to all levels of government. If British Columbians were required to pay all of their taxes up front, they would have to pay each and every dollar they earned to governments prior to Tax Freedom Day.

Using the Tax Freedom Day methodology, the Institute calculated when Tax Freedom Day would fall in 2011 for the average BC family under the current PST tax system and compared it to where it would fall under the HST tax system. In both instances, Tax Freedom Day falls on June 8.

"Under the HST, there is no change in Tax Freedom Day; a harmonized sales tax has basically no impact on the total tax bill paid by the average family," Veldhuis said.

The Institute's Tax Freedom Day calculations found that the average family will pay slightly more provincial sales tax under the HST than it would under the existing PST. Specifically, provincial sales taxes paid by the average family would be $249 higher under the HST in 2011, $3,382 in provincial HST compared to $3,133 in PST. At the same time, the personal income tax reductions brought in by the government reduces the average BC family's income taxes by $205 in 2011, from $11,245 to $11,040.

All told, the total tax bill for the average British Columbian family will increase by $44 from $37,562 under the PST, to $37,606 under the HST, a negligible amount representing only 0.12 per cent of the average family's total tax bill. In the context of Tax Freedom Day, it's the equivalent of working an extra 63 minutes a year for government under the HST.

"The claims of large tax increases and other distortions spread by opponents of the HST have no foundation in reality and are not backed up with reliable data or sound analysis," Veldhuis said.

"Quite simply, the HST is good for British Columbia. It will lower investment costs and spark more business investment and development. This will ultimately make BC workers more productive, increase their wages, and create more employment opportunities."

The Impact of the HST on British Columbian Families is the first of two analytical studies the Fraser Institute has conducted on the effects of BC's HST. The second study on the HST will be released later this month.

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The Fraser Institute is an independent Canadian public policy research and educational organization with offices in Vancouver, Calgary, Toronto, and Montreal and ties to a global network of 75 think tanks. Its mission is to measure, study, and communicate the impact of competitive markets and government intervention on the welfare of individuals. To protect the Institute's independence, it does not accept grants from governments or contracts for research.

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