Editorial: GST proposal unhealthy for tax base

Rahui Katene. Photo / Supplied

Maori Party MP Rahui Katene is doubtless well intentioned in her desire to encourage good eating habits by removing GST from healthy food. But her private member's bill, which has had the good fortune to be drawn from the ballot, is certainly not the way to go about it. For the small amount of good that might be achieved, there would be major and malign consequences in terms of the integrity of the tax system.

The best feature of GST since its introduction in 1986 has been its comprehensiveness. Unlike many countries, New Zealand has not been tempted to create exemptions, which add greatly to the complexity of the tax, and to the potential for confusion. This means payment is relatively simple. There are none of the complications introduced by, say, an exemption for fresh food, as is the case in Australia. For once, New Zealand business can have no complaints about difficulties of compliance.

This purity also negates any bending or distorting of the system. There would, inevitably, be much debate over exactly what constitutes healthy food if it were removed from GST. Britain's experience confirms as much. There, most food is exempt from a value-added tax of 17.5 per cent in a complex schedule that aims to separate essentials from luxury items. In a celebrated case, this led to a dispute over whether jaffa cakes should be exempt from VAT or, as was finally ruled, classified as chocolate-covered biscuits and liable to the tax.

Ms Katene's bill would remove GST from fruit and vegetables, bread and cereals, some dairy products, lean meat, poultry, seafood, eggs, nuts, seeds and legumes. Dairy products that would continue to attract the tax would be ice-cream, cream products and condensed and flavoured milk. It is easy to spot the problems of definition. Where does low- or non-fat icecream fit into that schedule? This would be just the tip of a contentious ice-berg. Legal firms would be the big winners.

The Labour Party's alternative of removing GST from fresh fruit and vegetables would introduce much the same problems, and the same incentive for businesses to work the system to their advantage. The only difference would be the scale of loss to the tax base. The Maori Party's bill would mean forsaking about $330 million in badly needed revenue annually, while Labour's idea would cost $200 million a year.

To make matters worse, there is no guarantee that the removal of GST would prompt a significant upswing in healthy eating. Inevitably, a 12.5 per cent discount would have some impact. Researchers from Auckland and Otago universities, having surveyed 1100 supermarket shoppers, estimated the increase in the sale of healthy foods could be as high as 11 per cent. Most promisingly, more than two-thirds of this would be fruit and vegetables.

But, disappointingly, the study also found the amount of less-healthy food bought did not change. In the end, only a "modest" improvement in healthier purchases was recorded. The impact on overall diet was, correspondingly, very limited.

Price is a major trigger for the purchase of any consumer item. Given a 12.5 per cent discount, something more than a "modest" impact might have been anticipated. This is not a result that would warrant the axing of a key aspect of this country's goods and services tax.

The National Party, rightly, is set to oppose Ms Katene's bill when Parliament returns from recess next week. It knows that any breach of GST would be the precursor to equally worthy calls for education and health services and suchlike to be granted exemptions.

Healthy eating is a laudable goal, but the Maori Party needs to find a smarter way of achieving it.