Harmonize taxes, but with care

TheStar.com - Opinion - Harmonize taxes, but with care
March 08, 2009

After years of debate and false starts, the time has finally come to "harmonize" the provincial sales tax with the federal GST.

Putting the two taxes together as one harmonized tax of 13 per cent – as four provinces have already done – would be good for business and good for the economy.

For businesses, a harmonized sales tax would relieve them of the paperwork and legal burden of meeting the requirements of two different tax collectors. It would also reduce the cost of the materials and equipment used to make their products, which are now subject to the provincial sales tax but not the GST. These business "inputs" would effectively be tax-free under a harmonized sales tax.

"All of this adds up to businesses that are more competitive and better able to go head-to-head with companies around the world," says Len Crispino of the Ontario Chamber of Commerce. "For example, manufacturers that have been extremely hard hit by global competition would be able to produce products at a lower cost, helping them preserve jobs here in Ontario."
For the economy, harmonization would mean long-term increases in gross domestic product, productivity and household incomes.

But there are political downsides to harmonization, which is why no Ontario government has done it over the past two decades. And the McGuinty government must proceed with care if it chooses to harmonize the two taxes in the March 26 provincial budget.

First of all, harmonization would shift more of the tax burden to consumers. And it would tax some items not currently subject to the provincial sales tax, such as heating fuel and restaurant meals under $4. Accordingly, there must be some built-in protection for low-income Ontarians. The chamber of commerce suggests a tax credit of $500 for every low-income household, which would cost about $370 million. * Tax Credit doesn't help at point of purchase. Some lower income people would not benefit from tax credit.

Furthermore, the shift to a harmonized tax would mean less revenue for the provincial treasury. Although estimates vary, the loss would be in the range of hundreds of millions of dollars. * "WOW- Pst expanded in HST to cover more goods and services results in less revenue for the Provincial Treasury? Do the editorial writes want to to buy some swamp land in Florida that is for sale?"

Federal Finance Minister Jim Flaherty has described harmonization as the "single most important step" that could be taken to make Canadian businesses more competitive. Ottawa, then, ought to provide transitional funding to Ontario, as it has for the provinces that have previously taken this step.

Finally, harmonization would have a major negative impact on the housing sector, already hard hit by the recession. That's because while new homes are subject to the GST, they are exempt from the provincial sales tax.
If the full 8 per cent provincial sales tax were applied to new homes under harmonization, it would more than double the tax on a $350,000 house or condo to $39,200.

To get around this problem, the builders have suggested the provincial share of the harmonized tax on new homes be limited to around 2 per cent. * 2% still means $7000 cost added on to house prices. I can only predict that in the future government would likely raisethe percentage once the HST has been accepted.

With these caveats, the McGuinty government should begin moving toward harmonization in the upcoming budget.