Estimating the Impact of the HST

In the last month we have seen two studies released on the impact of the HST - Consumer Impacts of BC’s Harmonized Sales Tax (PDF) by Jonathan R. Kesselman and The Impact of Sales Tax Reform on Ontario Consumers: A First Look at the Evidence (PDF) by Michael Smart.  Both papers examine the impact that HST had on the prices of a representative basket of goods in each province. Both papers use a rather clever method - Smart compares price changes in Ontario before and after the HST with price changes in Quebec over the same period where the HST was not enacted.  Kessleman does the same, except compares British Columbia to Alberta, Saskatchewan and Manitoba.  By doing so the papers can isolate price rises due to the HST relative to price rises caused by 'regular' inflation.  Both papers find shockingly similar results:

Kesselman on B.C.:

My analysis of the consumer price index (CPI) finds that the HST resulted in a 0.6 of one percent increase in overall consumer prices in BC.  This finding indicates that the average consumer is now paying just one additional dollar for every $165 of spending...

This 0.6 percent price impact of the harmonization consisted of plus 1.0 percent in the first month (June to July 2010) followed by minus 0.5 percent for the following five months (with 0.6 rather than 0.5 the result of rounding).  The negative figure for the five months from July through December 2010 is evidence of substantial passthrough to consumers of the tax savings for business... 

Smart on Ontario:

The effect of harmonization was to raise consumer prices in Ontario by an estimated 0.9 percent in July 2010. By December, the effect of harmonization had fallen to an estimated 0.6 percent, as sellersincreasingly adjusted prices to absorb some of the consumer tax increase. The gradual decline in price impact over time reflects how input tax credits are passed on toconsumers by businesses, or how the new taxes are otherwise being absorbed by sellers.These estimates suggest that about two-thirds of new input tax credits are already reflected in lower consumer prices.

I found it interesting that both papers looked at different provinces, used different provinces as controls and came up with nearly identical results.

There is a fair bit of infomration in the two studies on distributional impacts and impacts of the HST on particularly classes of goods.  I highly recommend both papers.

Comments

[MikePMoffatt]

One point I forgot to mention in the write-up: This is another piece of evidence (if we ever needed any) against the flypaper theory of taxation. Although consumers are the ones be taxed, some of the tax is clearly being passed to business. Note that this result is strictly an empirical one - no theory is used in obtaining that result.

[Bob Smith]

I confess, I haven't read either paper (although I looked briefly at Smart's paper), but the conclusions seem pretty plausible. I wonder, though, if they might overstate the impact of the HST, to the extent that prices in other provinces also fall as a result of prices of goods and services consumed by consumers in other provinces. I mean, to the extent goods and services are, say, manufactured or provided in Ontario, the cost of embedded PST would have been passed-along to consumers both in, and outside, Ontario. Similarly, you'd expect the savings on such goods and services to be shared equally.

[Jacques René Giguère]

A change in sales taxes is not an economic phenomenom. It has economic consequences but unlike a change in the price of coconuts or chickens,it comes from the political choice of sales tax vs income tax vs more or less gumnent services. It is micro, not macro. You can collect HST in chickens ( not efficient in collection, storage and paying the mercenaries, that's why we use money) but, since inflation requires money, raising the tax collected in chickens cannot be inflationnary.

What is interesting are the macro consequences: the rise in CPI is seen by the public, pundits and much worse, the policy-makers as "inflation" even though it is a rise in real and relative prices. Higher relative price to money,yes, but not from a monetary phenomenom. It is contractionnary, not inflationnary and yet Central Banks will see the "need" for a restrictive policy to quell "inflation". Even though there are differences on how people feel about price increase vs income tax increase vs reduction in wages, transaction taxes shoud never, ever , be a part of any price index. An index of purchasing power maybe ,not a price index.

[Frances Woolley]

Mike "Although consumers are the ones be taxed, some of the tax is clearly being passed to business."

But on the other hand, Michael Smart writes: "These estimates suggest that about two-thirds of new input tax credits are already reflected in lower consumer prices." And the remaining one third? Presumably going to business in the form of higher profits?

[Mike Moffatt]

Frances: That would be my take on it too.

Bob: That hadn't occurred to me. I'll have to think about that.

[Michael Smart]

Frances: Higher profits maybe in the short run but, really, in the long run?

Another more plausible candidate is higher wages. In import competing industries a tax on costs doesn't get embedded in prices because competitors don't face the same tax. So when the input tax comes off, prices won't go down either. Instead you have an increase in "competitiveness".

Certainly there are non-competitive industries where things work differently. But even there the literature is divided about whether taxes are undershifted or overshifted. A case in point for undershifting: there's a new 8% tax on gasoline in Ontario, but retail gas prices were only up 4% by December, relative to Quebec.

[btg]

This is assuming that CPI estimates are actually of any use to begin with.

come on - the HST (and related tax changes) might not have been a huge tax grab by the province, but clearly it was a huge tax shift from corporations onto Ontario consumers.

Corporations benefited from a cut in corporate taxes on profits, plus they now get a credit for the provincial portion of the HST, whereas before, any PST they paid was ultimately passed on to their customers. The net loss in money the province no longer gets from PST had to come from somewhere.

Ontarians are definitely paying more in taxes on those goods and on services that were previously exempt, so this is probably providing the extra revenue for the reduced taxes on corporations. Yet, it is unlikely that companies will pass along any increased after-tax profits to consumers instead of passing it on to shareholders, so the big questions remains as to whether corporations have cut prices to compensate at least for the savings in the net amount of PST they are saving.

Here is the problem: many companies in Ontario sell their goods and services not only to Ontarians, but they export their products to the rest of Canada, the US, and the world. Few companies charge a different price to Ontarians than they charge to other buyers. For example, GM and Honda make cars in this province, yet most of the cars made in Ontario are not sold in Ontario, so therefore most of the savings on any reduction in price would benefit people who live outside of Ontario! And of course, GM did not reduce the price of its Camaro when the tax came into effect, nor did any other automaker reduce the list price of its made-in Ontario vehicles.

So the answer must be this: few companies reduced prices, and even if they had, chances are that the benefits were be spread to all buyers, of which Ontarians are but a small minority, so in the end we cut stuck with the bill but don't see much, if any, savings on what we buy.

[Mike Moffatt]

" Few companies charge a different price to Ontarians than they charge to other buyers."

This is demonstrably false, as a quick jaunt across the border will illustrate. I take a trip to Port Huron, MI, once a month as prices for some of the things I buy are significantly lower.

RE: Companies lowering prices - we in fact saw this happen, as shown in the two research papers above.

[Bob Smith]

BTG: "come on - the HST (and related tax changes) might not have been a huge tax grab by the province, but clearly it was a huge tax shift from corporations onto Ontario consumers'

I'd agree the HST involved a significant change in who pays the tax, corporations, or consumers. In terms of the incidence though, I suspect it will involve a shift of the burden of taxes from workers to consumers. I mean, let's follow-through on your analysis. You're saying that companies already sell their products at the world price, so they don't reduce their price (certainly true of export-oriented manufacturing industries, but probably less true of service sector industries or local products). In the short-term, that makes companies who invest in Ontario more profitable. In the long-run, though, Ontario attracts more investment until the Ontario return on capital returns to the global return on investment. The increased capital stock results in increased employment and increased wages in Ontario. Ontarians will see benefits from the HST, it just might not be on the "savings" side of the equation.

There's a reason why Ken Lewenza and the CAW has urged the Ontario NDP not to run a campaign against the HST
(http://www.caw.ca/assets/pdf/Ken_report-dec09-final.pdf). The autoworkers know where there bread is buttered.