McGuinty faces fight over sales tax shakeup

Premier's talk of merging PST with GST has Liberals fearing backlash from voters
Mar 12, 2009 04:30 AM
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ROBERT BENZIE
QUEEN'S PARK BUREAU CHIEF

Premier Dalton McGuinty's move toward harmonizing the 8 per cent provincial sales tax with the 5 per cent GST is meeting with sharp resistance within his Liberal caucus, the Star has learned.

Behind closed doors in Tuesday's caucus meeting, skittish MPPs aired grievances over the scheme – which would raise consumption taxes on books, feminine hygiene products, heating fuel, children's clothing, diapers and fast-food value meals by 8 per cent while reducing the overall tax burden for business.

The premier has been receptive to arguments from business people who say they are at a disadvantage because they pay more in taxes to purchase equipment or machinery than competitors in Quebec or the Atlantic provinces, where the two taxes have already been harmonized.

But Ontario consumers would feel the impact immediately because many products that are now taxed federally but not provincially would be subject to the equivalent of both taxes under a harmonized system.

"People are nervous," said one Liberal, who like others spoke on condition of anonymity out of fear of reprisal from McGuinty's office.

"No one wants to give voters some reason to toss us out in 2011," grumbled another Liberal.
Quebec, New Brunswick, Nova Scotia and Newfoundland have blended their provincial taxes with the federal goods and services tax and federal Finance Minister Jim Flaherty wants Ontario to follow suit.

McGuinty, who has mused about tax harmonization for weeks as a cornerstone of his plan to jolt the recession-battered economy, confirmed yesterday "it's one of a variety of options that ... we're taking a look at" in Finance Minister Dwight Duncan's March 26 provincial budget.

"We've heard from ... a lot of folks in the business community who are in favour of this. We've heard from others who have got some concerns about this. It's one of a host of options I know the minister's looking at," the premier said.

The government has offered no analysis to determine how much of a benefit or a drain harmonization would be on the provincial treasury.

The Ontario Chamber of Commerce said in a recent report that a straight harmonization of the taxes should have no impact on direct tax revenues. The report urged the province to quickly harmonize the taxes to benefit manufacturers and farmers, among others.

Because the PST would be removed from manufacturers' purchases of machinery, equipment and other items not subject to GST, it would lower their cost of doing business. In the decade after taxes were blended in Atlantic Canada, the chamber found, investment in business equipment and machinery rose a healthy 12 per cent each year above the level before harmonization.

The Ontario Federation of Agriculture estimates farmers pay an additional $25 million annually in provincial sales taxes compared with their counterparts in Quebec and the Atlantic provinces.

The Building Industry and Land Development Association released a study yesterday suggesting harmonizing the taxes would cost new homebuyers $2.4 billion more a year – and add $46,676 to the price of a new home in Greater Toronto.

"There's no point putting the gas pedal to the metal from a stimulus standpoint while braking equally hard with the other foot, but that's what harmonizing the sales tax on housing amounts to," said association chair Leith Moore.

When McGuinty was asked if he worried about paying a political price for slapping an additional 8 per cent levy on some consumer items, he said: "The minister of finance has got to look at that."

Duncan was not available for comment yesterday.

Other Liberals were talking, however, and some are afraid the fix is in to do something that may be good economics but bad politics.

"People were reminding Dalton (in the caucus meeting) about the `fat tax,'" said a party veteran, referring to the 2004 debacle when then-finance minister Greg Sorbara considered ending the PST exemption on fast food costing less than $4.

After an aggressive lobbying effort by the restaurant industry, Sorbara and McGuinty backed down. (Harmonization would mean an additional 8 per cent tax on those value meals.)

Another, more hefty tax – the annual health premium of up to $900 a person – was unveiled in that 2004 budget, something that still haunts some Liberals.

"We were reminding McGuinty about the way that was foisted on us," said one MPP, while another said the premier "has learned a lot from the way that tax was rolled out" and that he consults more with caucus.

"There were lots of questions asked and few answers given," complained another MPP, adding others in caucus noted the fate of Nova Scotia Liberal premier Russell MacLellan, whose 1997 tax harmonization effort contributed to his defeat in 1999.

"There were a lot of horror stories told," agreed another Liberal.But government proponents of blending the taxes argue that Ottawa likely will provide some infusion of cash or exemptions to offset the new tax burden. They point out that was the case with other provinces.

A senior federal official said no decision has been made on financial help to Ontario during any transition, but the insider expressed admiration for McGuinty's boldness.

"It's politically dangerous. We're glad he's looking at doing it, but it could really hurt him," said the source.

Link to post; with additional comments
http://www.thestar.com/News/Ontario/article/600884