The decision of the BC Government  to harmonize the GST and the PST has attracted quite a lot of unfavourable reaction.  Most of critical the attention has been devoted to the increased taxes that consumers will pay under the new arrangement.  Everything from new houses to hotel rooms to haircuts to restaurant meals to consulting services will now be subject to an additional tax.  This is no small matter to hard pressed consumers trying to survive the worst economic conditions in decades.

Most of the opposition has thus  fccused on the tax grab by the BC government.  The exact amount of extra taxes to be paid by consumers was not disclosed by the government in its annoucement but it is expected to be in excess of $1 billion per year.  Adding to the aggravation is a payment of $1.6 billion to the BC Government by the Harper government, none of which will go to hard pressed consumers.

Why did the BC Government do this?  And why this year?  And why did it not reveal its intention to do so in the recent election?

The reason is not hard to find.  While consumers get a huge tax hit, large business gets a big tax break.  The tax break for businesses will be $1.9 billion each year.  The reason – under  GST rules they will no longer have to pay sales tax on a vast array of items they purchase.

As much as anything, the harmonization is a political move.  The large business community was unstinting in its support for the Campbell government in the election.  While most observers thought there would have to be a quid pro quo after the election, few thought it would be on the tax side, given the state of government revenues.  And as recently as 2006, the government’s blue ribbon Productivity Council recommnded against harmonization because of the overall economic impact.

But election debts must be paid.  Even though “It’s a tough political decision because it shifts the burden of taxation from businesses to consumers,” according to Derek Burleton, an economist and director of economic analysis at TD Bank. Better now when the next election is far off.  And what better way than to cut business taxes by having consumers pay most of the bill.  At least that means it doesn’t all have to be added to the deficit.  Not for the first time government gains at the expense of consumers.

But is it such a tough political decision for the reason stated by TD Bank?  It is noticeable that so little has been made of the shift of tax from businees to consumers by the political opposition.  No one seems want to talk  much about the business tax break that goes with harmonization.  It makes one wonder whether the opposition is intentionally not addressing the whole picture.  The Finance Minister is trying to force them to do so, arguing that business will reduce prices if harmonization is implemented.  Surely at some point the opposition will have to address the business tax cut side of the argument if it wants to get the government to reverse direction.  It might do so by demonstrating that the cut will unfairly add to business profits in the absence of guarantees that prices will be reduced, and that since such guarantees would be unworkable the whole intitiative should be scrapped.  Unless of course the opposition message, like the burden of the tax itself, is mostly for taxpayer consumption.

There has been considerable talk of late about ‘green shoots’  in the Canadian economy.  These are apparent signs of renewal in parts of the economy that suggest that the bottom of the recession has now passed and the beginning of a recovery is now underway.

If this is the case, those who fear further losses in wealth, incomes and jobs can find some hope.  So too  can governments,  whose fiscal, credit and bail out measures of the past few months have been extraordinary.

It is in fact difficult to find much comfort in the facts.

Statistics  Canada tracks what is happening in the economy through a set of monthly leading indicators.  If there are in fact green shoots it should be possible to locate them in these indicators.

The most reliable indicator of what is happening is a composite that brings together all of the indicators into one overall measure.  Dramatic and indeed unprecedented declines in the composite index starting in October 2008 accelerated until March, 2009.  In April the rate of decline slowed from -1.4% in February and March to -1.0% in April and to -0.1% in May and June.    In other words, overall economic activity continued to drop each month, although it dropped less precipitously in April,  and moderated again in May and June.

This reduction in the rate of decline in the economy  is an important source of the optimism that is now heard from time to time from serious observors.

Two things about this are worth noting.  First, a slowing of the rate of decline is hardly a reversal in our fortunes.  The cumulative effect of the continuing declines mean that there is now a gap between potential and actual activity larger than any time since the Great Depression.  Further monthly  declines, whatever their size, simply make this gap larger, meaning conditions are in fact worsening.  Things cannot be said to be getting better until the indicator moves into positive territory.

A further problem with taking too much comfort from the slowing rate of decline is that the sources of this slowing are not all that convincing.  The composite leading indicator is an amalgam of ten separate indicators.  The main factors explaining the reduced rate of decline since March are increases in the stock market (TSX)  index and in the money supply.  Neither are good measures of improved conditions in the economy.  There have also been increases in sales of houses already built, but this does little for jobs or business, and thus does not represent improvement in the working economy.

The growth in the money supply is a measure of credit easing by the Bank of Canada.  It says nothing about improved economic conditions unless private lending and investment increase.  To date there has been no improvement in either.

The growth in the stock market has had the largest impact on the composite index since March and is the main source of its reduced rate of decline.  It is also one of the main factors that has created the perception that things are starting to get better.

However unlike the other components of the composite index, the stock market does not necessarily bear any relationship to actual conditions in the economy.  Rather it is a measure of expectations of those who have savings or funds to invest.  Its increase reflects two things.  One is a correction for an excess of pessimism that may have existed at the low point in the February – March period when fears about the future were running high.  Second it measures hopes for improvement based on what they see is happening now.  The main and perhaps only things they have as a basis for positive expectations are the various stimulative and credit easing policy measures of government.  The bounce in the stock market is thus nothing more than an expectation that these policies will work.    If they work as expected the stock market will have already factored that in and the market will remain stable at the current levels into the foreseeable future.  If the measures don’t turn out to bring the improvements in employment, production, investment, trade and incomes that investors expect, the market can be expected to fall back to previous low levels.

So all that we can really say from the indicators is those with money to invest expect that the various policy measures taken to date will work, at least to the extent that justify current stock prices.  If that expectation turns out to be wrong, more stimulation will be required and other options pursued.  For the moment it is too early to tell.  But talk of green shoots must be largely discounted.  Actual conditions in the economy generally continue to worsen, and it will be a while yet before we will know whether government policies are working.

July 2 marked the deadline to pay local property taxes and many homeowners are justified in asking, “Why are my taxes rising so steeply?”

Part of the answer is that local governments in British Columbia are among the least supported in Canada by provincial financing, and the amount of such support has dropped dramatically over the past ten years.

For example, the BC government provided about $5,325 million to municipal governments in 2007-2008, compared to about $8,850 million in 1997-1998. Over the same period, off-loading has been substantial and local government costs have increased markedly.

Taxpayers in Vancouver have been especially burdened. Notwithstanding unprecedented growth in the property tax base, residents experienced a tax increase of almost 8% in 2009,and there is little relief in sight.

Approximately a quarter ofthis increase was due to a shift of the tax load from businesses to residents, and city council has vowed to continue shifting the tax burden onto residential taxpayers. Furthermore, there is little likelihood of any reduction in cost pressures in the near future. Indeed with the Olympics in 2010, additional cost pressures are almost a certainty.

It is highly unlikely that residential taxpayers will be willing to accept tax increases in the 8%-10% range in coming years. The 2009 increase, at a time when inflation is below 2% and wages are generally frozen, failed to galvanize focused opposition. Arguably this was because of the unusual silence of the city’s business organizations, the usual lead voices in anti-tax campaigns. This silence was no doubt intended to reward the city for the tax shift from commercial to residential property, but it seems unlikely that it can be counted on to continue in the future.

The danger, of course, is that in the next budget cycle, tax resistance will blossom into a full-blown tax revolt in the face of rising costs. If so, councillors will find that further tax increases could very well be at the cost of their electoral survival. In an effort to bring tax increases in line with inflation, cuts in programs and services could become inevitable. The hopes and dreams of progressive citizens could be smashed by a revenue crunch that few saw coming.

There has been virtually no public discussion of this impending crisis in local government finance. The province, with its own financial crisis, has no inclination to reverse its abandonment of local government, and city councillors don’t see any point in stirring up voters and employees until they absolutely have to.

This is short-sighted. It is essential that a dialogue begin between taxpayers and their elected city councils. Tax increases on the same scale as those of 2009 will almost certainly be unacceptable. Other alternatives must be explored and pursued.

The real problem is that local governments have been starved of finances over the past decade. They have been forced to rely almost exclusively on one source of revenue – the property tax base – which includes the local property tax and property-based user charges. In British Columbia, these together make up about 85% of municipal revenue, the highest proportion in Canada.

The only alternative to ever growing charges on property is to expand the tax base of municipalities.The heavy reliance on property taxes is not sustainable if local services are to survive in the form we now know them. A tax revolt cannot be disavowed as simply a matter of speculation.

Sales taxes, including fuel taxes, are an option, much as is the case in many cities in the United States. One advantage of such taxes is the burden is extended to tourists and visitors who draw on local services but contribute little to their costs. New, reformed business taxes that are fairer than property taxes are another possibility. And there are several other possibilities.

But the important point is that we need to start talking about these matters. Cities in particular are vulnerable to a wrenching fiscal crisis if we do not turn our attention to these matters.

This article first appeared on ThinkCity.