David Murrell, Ph. D is Senior Fellow at the Canadian Centre for Policy Studies and a professor in the Department of Economics, University of New Brunswick, Fredericton, NB.

Read the full report: Impact of HST on Ontario and British Columbia households by income Quintile

Executive Summary 

This paper measures the impact of the new HST tax, implemented on July 1, 2010. by the Ontario and British Columbia governments, on households. The paper focuses on the effects of the tax regime change, from the retail sales tax (RST) to the HST, on the five income quintiles as defined by Statistics Canada. I use consumer spending data from Statistics Canada's 2008 Family Expenditure Survey and Statistics Canada's housing investment data (and the 2006 Census) for tax changes in new single-unit, owner-occupied housing. I assume that 60 percent of input tax savings, to firms and non-private agencies, are passed on to consumers. Finally, I use published information from provincial government studies and budgets to measure personal income tax reductions - to calculate net tax changes.

My results are as follows. 

• for both Ontario and British Columbia, the switch to the HST tax (and the accompanying personal income tax relief measures) represent, on average in the longer-run, a net tax increase for households. For British Columbia, the net tax is estimated at around $320; for Ontario the change is around $290 (all dollar amounts are $2008 - the benchmark year used for all data and calculations in this paper);
• in the first year - before the Ontario transition payments expire and before larger savings from input-cost reductions kick in - the net tax disparity between Ontario and British Columbia is quite large. In Ontario the average family sees a gain of about $145 in tax relief; for British Columbia the average family can be expected to pay an extra $480 in taxes; 
• the tax rise from the tax regime change is much higher than that suggested in the Government of Ontario's technical paper, "Ontario's Tax Plan for Jobs and Growth". This is because (1) the Government of Ontario amortizes the HST tax increase (for new housing) over many years, reducing the tax increase for ·year 3ft in their study. and (2) the Government of Ontario assumes a high 90 percent pass-through rate for cost savings by businesses, from input-tax write-offs; 
• the net per-family tax increase in British Columbia is higher than that for Ontario, given that the Government on British Columbia has granted much less in the way of personal income tax relief. This is true. even though the pure HST tax increase in British Columbia is considerably lower than that for Ontario;
• for both provinces, the pure HST tax increase is regressive: it impacts low-income households far greater than that for higher-income households. But the accompanying personal-income tax cuts are very progressive, such that on balance the net impact is modestly progressive - from the poorest households to upper-middle class families. There is no further progressivity from the upper-middle class to the rich households.
• the change towards an HST tax on consumer services is highly regressive, but the imposition of the HST to tax new construction (new homes over a certain price limit; renovations and additions) is modestly progressive.