Ontario sales tax reform: small pain for (hopefully) longer term gain
Ontario's budgetary move to blend its provincial sales tax with the federal goods and services tax might have some political watchers puzzled.
After all, Ontario has been hard hit by a manufacturing meltdown, especially in the auto sector. Thus, provincial unemployment is rising, making Ontario residents particularly crabby these days.
To analysts, boosting prices on household goods does not seem the best way for Ontario's premier, Dalton McGuinty, to wiggle his way into voters' good graces.
But, most economists sing in unison when it comes to tax harmonization.
These practitioners of the dismal science generally agree that, when a province adds its sales tax, eight per cent in Ontario's case, to the current five per cent national GST, the region and the country as a whole win in terms of economic expansion and increased productivity.
"This tax reform is long overdue as Ontario struggles to put its economy on a better growth path," wrote Jack Mintz, a University of Calgary economics professor and former president of the C.D. Howe Institute recently.
Nifty theory
The theory is right out of an economics textbook.
Economists figure that, to be effective, you have to apply sales taxes to as many things as possible. By widening the tax base, you can keep the rate low on any one product or service.
Right now, Ontario's retail sales tax system applies to some things and not others and has some special categories where Queen's Park keeps the tax percentage lower to encourage more buying.
Tax harmonization might sound like a strange barbershop quartet term. In fact, however, it refers to applying a single retail sales tax in Ontario.
Right now, the province applies an eight per cent sales tax on many items but exempts some products. The federal GST is five per cent and gets slapped on more items.
Under a harmonized system, the two taxes would be applied to more products than are currently covered by the GST and be set at a 13 per cent rate
Economists hate that system.
Facing a sales tax regime with all the consistency of past-due-date yogurt, people often make purchasing decisions based upon how much tax an item attracts, economic experts say.
Mintz and his ilk would rather that everything get hit by the same tax rate, a situation which will not distort whether or not people buy. Thus, sales tax reform means some products and a whole bunch of services will face a new levy.
As well, right now, businesses are not allowed to deduct the PST from the cost of materials and other products they buy. Instead, they either eat the higher input prices or pass them along to consumers.
Indeed, the Ontario Chamber of Commerce recently estimated that, in 2008, each Ontarian paid $961 in provincial sales tax, with at least $65 hidden in the before-tax price of some products.
A harmonized tax lets companies claim credit for the PST they pay, a more efficient system, advocates believe.
"Sales tax reform reduces the cost of capital in Ontario, which boosts investment, raises productivity and the standard of living in Ontario," the OCC opined in a study it commissioned on the sales tax.
Indeed, in Nova Scotia, which along with New Brunswick and Newfoundland blended the two sales taxes back in 1997, investment in equipment rose 12 per cent after retail tax reform, according to another study.
Tough reality
Unfortunately, for the tax harmonizing crowd, individuals — mainly voters — rarely applaud this type of tax reform.
After all, the price on some things they buy will go up.
New homes in Ontario are one such item.
The Building Industry and Land Development Association, an Ontario construction group, estimated that a blended tax would add $46,600 to the price of a high-end home in Toronto.
People buying other previously exempt items will face similar sticker shock.
In fact, consumers are not really the beneficiaries of this type of tax reform under any scenario.
Businesses are.
The OCC report, for instance, figured that a fully blended system would cost consumers approximately $905 million in additional sales taxes while the GST-PST bill for companies would fall by $1.6 billion.
Overall, the economy benefits because businesses will find new equipment, be it computers or front-end loaders, cheaper. And the extra gear should make firms more competitive.
Better yet, the overall tax bill under this scenario drops by $700 million, cash that will be in the pockets of somebody and be ready to be spent.
How much gain?
Observers, however, have noted that, in the past, tax harmonization has been a hard sell across Canada because the economic gains do not appear to be jaw-dropping even years after implementation.
The C.D. Howe Institute, vociferous reform supporters, produced a study last September lauding the benefits of blending the two sales taxes.
But, the business think tank estimated that Ontario would lose 53,000 jobs between 2009 and 2012, gaining 5,500 new positions in 2017.
And the report also figured that the province's gross domestic product will contract in 2009 and only turn positive in 2011.
In fact, by 2017, Ontario's GDP will only gain a mediocre 0.48 per cent.
Even when Brian Mulroney's government introduced the GST more than 15 years ago, Ottawa had estimated improved productivity in the range of less than half of a percentage point, a notional gain subsequently wiped out in the recession of the early 1990s.