Primer on Harmonization
In Ontario, British Columbia, Manitoba, Saskatchewan and Prince Edward Island there is a GST and a PST. Harmonization will replace this with a single harmonized sales tax.
The GST is what is known as a “value added” tax. Businesses are reimbursed for most of the GST that they pay on their purchases [“inputs”]. However, the PST payable on some inputs and capital investments is not reimbursed. The HST will function like the GST, therefore allowing companies to be reimbursed for the PST portion as well as the GST portion, essentially reducing their provincial tax burden. The argument is that taxes on capital goods should be avoided because they limit growth of capital stock and reduce the long-run growth of productivity and employment. With a harmonized sales tax, businesses would no longer pay taxes on inputs and capital investment. This would allow a province’s businesses to be more competitive, attracting more investment from outside the province, encouraging businesses to invest more in capital and making a province’s exports more competitive. This is what led Ontario to harmonize its taxes, a move that had already been made by New Brunswick, Nova Scotia and Newfoundland and Labrador in 1997. British Columbia, likely fearing increased competition from Ontario, has also decided to harmonize its taxes. However, Quebec was the first to reform its taxes in 1992 with the Quebec Sales Tax (QST). The QST employs a modified value added system, which at first only accorded limited input tax credits to firms. It has gradually expanded and its base has, for the most part, harmonized with the GST’s base as of 1995.
Provinces who still employ an RST, will likely feel pressure to harmonize their taxes to remain competitive with other provinces. There has been talk that Manitoba will harmonize its sales taxes as well.
CARP recognizes that tax harmonization has the potential for creating economic growth. However, it has been estimated that approximately 40% of the RST is generated by the taxes paid by businesses. If businesses no longer paying this, then there would be a sharp drop in governmental revenue. If tax reform is to be at least revenue-neutral, meaning that the government maintains its current level of income, then the taxes paid by consumers on their personal expenditures must rise. Currently, GST is paid on more items than the RST. In order to make up this revenue, the RST will adopt a similar base to that of the GST. The result will be an increase of 8% to the cost of products that are currently not subject to the RST.
This is harmonization’s “Achilles Heel”, the fact that it is a shift of the tax burden to the consumer. In response, the governments of Ontario and British Columbia have come up with ways to help consumers make the transition to the HST.
• Housing Rebate for homes under $500,000: For homes under $400 000 there would be a rebate of 75% of the provincial portion of the tax, with the rebate amount reduced for homes priced between $400,000 and $500,000;
• Ontario Sales Tax Transition Benefit of $1,000 for single parents and couples and $300 for single people, which would be reduced by 5% of the recipient’s net income over $80,000 for the single individual and over $160,000 for families, from the previous year. The benefit for single people is 3 payments of $100 (single people with income over $82,000 would not receive a benefit). For families it is one payment of $300 and two payments of $350 (families with income over about $166,700 would not receive a benefit);
• Ontario Sales Tax Credit will increase from $100/adult to $260/adult and to $50/child. It will be refundable and paid quarterly.
• Personal Income Tax Relief: Cutting the tax rate on the first tax bracket by one%age point, from 6.05 to 5.05%, effective January 1, 2010;
• Ontario Tax Reduction would reduce or eliminate personal income tax by $205 per tax filer and $379 per child or disabled or infirm dependant.
• Unlike any other province, B.C. will provide an automatic point-of-sale rebate so consumers do not have to pay the provincial portion of the HST at the pump for purchases of gasoline and diesel fuel for motor vehicles, including any biofuel components.
• A partial rebate of the provincial portion of the single sales tax for new housing to ensure that new homes up to $400,000 will bear no more tax than under the current PST system, while homes above $400,000 will receive a flat rebate of about $20,000.
• A refundable B.C. HST Credit paid quarterly with the GST and carbon tax credit to offset the impact of the tax on those with low incomes.
The idea that governments are trying to focus on is that this will indeed be a ‘transition’ to an HST. The idea that politicians use to make the tax shift more politically saleable is that as corporations save money in lower taxes and also the savings in administrative costs related to paying a single tax (as opposed to both the RST and GST), market forces and competition will force these corporations to pass on the savings to the consumers. Indeed, the distributional implications of harmonization depend on how much of the savings is passed on to the consumer.
Studies of the experiences of the Atlantic provinces’ move to a single tax system in 1997 revealed that there was a slight drop consumer prices, although prices increased somewhat for shelter, clothing and footwear, which tended to make the tax reform slightly regressive. However, the experiences of the Atlantic Provinces cannot be directly applied to Ontario and BC because those three provinces had much higher provincial sales tax rates (11.7% in Nova Scotia and New Brunswick and 12% in Newfoundland and Labrador), which were lowered to 8% when the taxes were harmonized. Indeed, supported by transition payments from the federal government totaling $961 million for the three provinces combined, the Atlantic Provinces hoped that the economic stimulus of the HST would yield enough economic growth to make up for the loss in revenue.
Another reason that the experiences of the Atlantic Provinces might deviate from those of Ontario and British Columbia is that the elimination of taxes on business inputs may have a greater effect on businesses costs, since the two provinces have a larger and more developed secondary and tertiary sectors. This has the potential of resulting in more than proportional reductions in costs.
Possibly in an acknowledgement that this ‘pass-through’ effect is not going to occur for all expenses that consumers must undertake, the governments of New Brunswick, Nova Scotia and Newfoundland and Labrador each have a credit, sometimes income tested, to assist with the cost of home heating. Not all industries are subject to the competitive pressures that will give rise to this much touted pass-through effect. Some economists have pointed out that a mixture of firms with market power and uninformed consumers can make it easy for businesses to increase markups when the taxes go down.
CARP members are predominantly retirees, many on fixed incomes who do not always have enough discretionary income to accommodate this tax hike which will cost the average Ontarian anywhere from $250 to $750 more a year. The government seems to be placing a lot of reliance on the idea that companies will pass through the savings to consumers. However, if this pass-through effect does not occur when the transition payments in Ontario run out in three years, CARP is concerned that many fixed-income seniors will simply be left paying higher taxes with no additional offset.
CARP recognizes the potential benefit that harmonization may bring for the economies of Ontario and British Columbia, but is concerned with the effect that this may have on older Canadians, especially those on a fixed income. Perhaps the transition benefit promised by government should not have a fixed term, but should be phased out when the savings to consumers have been effectively realized. Ontario Revenue Minister John Wilkinson was recently quoted as saying that consumers need to be sharp and insist that businesses pass on the savings. However, CARP does not believe that this duty should fall solely on the backs of the consumers.
Finally, CARP believes that the government should learn from the lessons of the provinces that harmonized back in 1997. Darrell Dexter, the new premier of Nova Scotia suggested to the premiers of the harmonizing provinces to be clear with just what the tax is going to look like and what it will affect. Other groups, such as the Canadian Taxpayers Federation is calling on the government to release a full list of goods that will increase in price due to harmonization. CARP agrees that the governments of Ontario and British Columbia should be as open as possible about the effects of harmonization on the increase in taxes on consumer goods, the impact on government revenue and the impact on consumer prices.