The Ontario government’s proposal to follow British Columbia, New Brunswick, Nova Scotia, and Newfoundland and replace its provincial sales tax (PST) with a harmonized sales tax (HST) has evoked a lot of anxiety.
Some perceive it as a tax grab. Others see it shifting the taxation burden from business to consumers, especially low-income families.
These views are fuelled by misinformation. In fact, the change will not only be good for the Ontario economy in these difficult times, it will also be done in a way that protects the most vulnerable among us. That’s why most economists favour it regardless of their political persuasion.
The basics of the tax reform are straightforward. The existing PST is a tax collected at the retail level on most goods sold as well as some services. Some essential goods like food, rental housing, children’s clothing are exempt, as are most services like haircuts and movies. The tax is paid by anyone—including businesses—who purchases a taxable good from a retailer. Business purchases make up a substantial part of taxable retail sales and the taxes firms’ pay are built into the prices of the goods and services they produce—thus called hidden taxes. Ontario firms pay the PST on their business inputs which puts them at a competitive disadvantage to non-Ontario firms, making it more difficult for them to compete in export markets, as well as in Ontario, against imported goods.
The HST has the same structure as the federal goods and services tax (GST) and differs from the PST in three main respects.
First, the HST applies to most goods and services, including services not taxed by the PST. Haircuts and movies will now be taxed, but not some basic services like public transit, rental housing and most health, educational and financial services.
Second, the tax applies to sales by all firms and not just retailers, whether they sell to individuals or to other firms. But firms who purchase taxed goods and services can obtain a rebate for the taxes paid, purging firms of taxes on their inputs and placing them on a more competitive footing with those abroad. This is a key attraction of the HST and the reason it’s been adopted by more than 100 countries worldwide.
Third, tax collection under the HST will be done by the same federal government agency that collects the GST. The existence of a single tax-collecting agency reduces the costs of collection and compliance for the Ontario government and taxpayers alike.
Tax reform is the system of cash rebates to low-income Ontarians being introduced as a part of the package. This is the analogue of the GST credit that accompanied the GST when it replaced the old federal sales tax 20 years ago. The GST credit is paid four times per year to taxpayers from low-income families. Its purpose is to compensate them for any additional tax burden imposed by the GST. A similar credit will apply to the HST and protect low-income Ontarians from additional taxes they may bear when the HST replaces the GST. Additionally, generous temporary payments would be made to low and middle-income families for two years after the HST is implemented.
Students will be eligible for this credit. Many of the things students purchase will not be subject to the tax, such as books, apartment rents, food and public transit—so they shouldn’t be adversely affected.
The same applies to universities themselves. Services universities provide are mostly exempt from HST, but tax is paid on many of their inputs. A partial rebate will be given so that universities aren’t made worse off by the HST.
Every policy reform has winners and losers, and the losers are typically noisier than the winners. This reform is no exception. It’s all too easy to dismiss the HST as a transfer of tax revenue from business to consumers and as a tax on lower-income citizens. That would be a serious misreading of the tax’s real effect. Ontario manufacturing firms are facing enormous challenges brought on first by the rapid appreciation of the Canadian dollar largely caused by the natural resource boom in Western Canada—and then by the severe recession in the U.S.—our most important trading partner. Climbing out of this requires that we don’t put Ontario businesses at an unnecessary competitive disadvantage. The HST reform removes one such unnecessary burden. That this reform can be accomplished in a way that rationalizes the Ontario tax system while protecting the most vulnerable citizens makes it an ideal—and non-partisan—reform. There’s no doubt the way we treat the neediest of our society is a national shame. But that shouldn’t detract from adopting the HST reform. It does no harm to the poor and doesn’t preclude us from moving on with a much-needed anti-poverty strategy.
Professor Robin Boadway served as the Queen’s economics department head from 1981to 1986. He is currently Associate Director of the John Deutsch Institute for the study of economic policy and the editor of the Journal of Public Economics.
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