Opinion: Axing HST would deepen deficit transition, government, political, intended, provided

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Opinion: Axing HST would deepen deficit
Ottawa would set terrible precedent if it allows B.C. to walk away scot-free


As British Columbians begin marking their ballots on the harmonized sales tax, the provincial government is preparing to bank the final, $580-million instalment of the money Ottawa provided as an incentive to adopt the HST.

The so-called transition funding, $1.6 billion in all, was intended to lighten the fiscal, administrative and political cost of merging the provincial sales tax with the federal goods and services tax.

Two earlier instalments, totalling $1.02 billion, were paid April 1 and July 2 of last year. The final instalment was scheduled for "the first business day" after the first anniversary of implementation of the tax, hence Monday.

Also a day when the fate of the tax itself will still be very much up in the air, given that most B.C. voters aren't expected to receive their postal-dispute-delayed mail ballots until next week.

The referendum results, under an extended schedule approved by Elections B.C. on Thursday, won't be known until early September. In the event the verdict is 'Yes' to extinguish the HST and reinstate the PST in conjunction with the GST, the B.C. Liberal government would then be obliged to turn back the clock on harmonization.

So why not put the final instalment of the federal transition funding on hold until the results of the vote are known? Nothing would be gained by doing so, according to Finance Minister Kevin Falcon.

"It is already booked in our fiscal plan as revenue anyhow," he told me during a brief telephone interview Thursday. Moreover, said Falcon, if the vote goes against the HST, the province intends to treat the entire transition fund, not just the latest instalment, as an amount that must be repaid.

"We are going to book the entire amount as a liability in this fiscal year," he said, citing the comptroller-general's reading of the generally accepted accounting rules the province follows in maintaining the public accounts.

The approach would mean that the provincial deficit, currently pegged at just under $1 billion, would grow by $1.6 billion. But a transition back to the GST/PST might have other fiscal consequences as well.

No province has ever fully merged its sales tax with the federal one, then reversed direction. Nevertheless, "it is possible to go back," as a government-appointed independent panel recently noted in its report on the choice facing British Columbians in the referendum.

"It can't be done quickly," the panel emphasized.

"Officials told us it will take 18 to 24 months. That includes rewriting federal-provincial tax laws and regulations, hiring back 300 tax collectors, rebuilding a provincial PST office and helping businesses readjust their accounting systems."

Part of the holdup would be a requirement for the province to negotiate an early exit from the harmonization agreement with the federal government.

The terms of the grandly named Comprehensive Integrated Tax Coordination Agreement do provide for either side to give notice of termination.

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But "it cannot be earlier than the fifth-year anniversary of implementation," meaning not before July 1, 2015.

The province cannot simply walk away from the HST with impunity, as some of the more reckless critics of harmonization have suggested. For the agreement says that in the event the province were to breach the terms unilaterally, then within six months the entire transition funding "will become immediately due and payable by the province as a debt due to Canada."

The rationale for this is set out in the agreement, and is the reverse of the rationale for harmonization in the first place: "An integrated tax system will support broader economic growth and job creation in both Canada and the province."

Whereas if the province de-harmonizes, then it is obliged "to compensate Canada for its loss and the impact on national economic growth and job creation."

Nor would it be necessary for the province to write a cheque for the amount.

Rather the agreement authorizes the federal government to deduct the transition funding from "any amount due to the province from Canada for any reason at any time until the [full amount] is fully paid."

So income taxes, transfer payments for health care and other social programs -you name it, the feds could tap it to the tune of $1.6 billion.

Federal-provincial agreements, like the one on harmonization, are the standard fare of cooperative federalism in this country. Ottawa would be setting a terrible precedent for dealings with other provinces if it allowed B.C. to walk away without keeping its side of the financial bargain.

Given all these considerations, the independent panel concluded that "if British Columbians decide to go back to the PST/GST, the B.C. government would likely have to repay the $1.6 billion that Ottawa paid to help ease B.C.'s shift to the HST."

That's not to say the province couldn't try to negotiate the repayment schedule or other kinds of offsetting relief. Only to emphasize that under the terms of harmonization, Ottawa would be holding most of the cards

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As British Columbians begin marking their ballots on the harmonized sales tax, the provincial government is preparing to bank the final, $580-million instalment of the money Ottawa provided as an incentive to adopt the HST