Ontario’s HST – Putting a price on the future

Much has been made of Dalton McGuinty’s Ontario Liberal government and their decision to introduce the harmonized sales tax (HST) in place of separate federal and provincial taxes. The move, according to the government, will lead to annual savings of up to $1.5 billion for Ontario businesses, savings that will not only lead to cheaper consumer prices down the road, but more important, a more competitive Ontario economy.

According to University of Calgary economist Jack Mintz, the implementation of the HST in Ontario and British Columbia will, thanks to the savings businesses will enjoy, lead to the creation of 591,000 net new jobs, increased capital investment of $47 billion, and increased annual incomes of up to 8.8 per cent, or $29.4 billion over the next ten years.

So given these distinct benefits of harmonization, why do a large majority (seventy four per cent to be exact) of Ontarians oppose its introduction?

There are some who believe that the HST is simply a means of padding government revenues, all the more believable given the current size of the Ontario deficit ($24 billion). Yet, unless the wool has been pulled over the eyes of much smarter men than I, it’s widely believed the introduction of the HST is revenue neutral. This is not a repeat of the introduction of the healthcare surtax which simply passed government expenditures directly to the taxpayer.

So why the negative reception despite the possibility of helping build a more competitive Ontario economy?

In effect, the new HST will see many items that were previously only taxed the GST, now taxed a harmonized 13 per cent, i.e. 8 eight per cent more.

This new tax will apply to approximately 17 per cent of purchases (for example, gasoline, home energy and Internet bills, tobacco, domestic flights, haircuts and taxi fares are items that will now by charged a full 13 per cent rather than the previous 5 per cent), all of which adds up to the fact that Ontario consumers will now pay more for the same basket of goods.

How much more?

That’s up for debate. Depending on who you listen to the cost of the HST to a family will range from anywhere from a positive net benefit of a couple of hundred dollars to a negative net benefit of almost two thousand.

The opposition NDP recently came out with calculations of what these increases would look like. Given the NDPs opposition status, these numbers should represent a worst case scenario!

They find that a family with a household income of between $50,001 and $60,000 will pay an additional $862 a year. For families with an income of greater than $100,001, it’s a $1,732 increase.

That’s a pretty big hit.

Using non-government sources, one finds that the average Ontario family will pay nearly $800 more as a result of the HST – a sum that reduces to $470 once transition cheques and tax breaks are taken into account.

These later two items, transition cheques and tax breaks, are what the Ontario government are using to offset those additional costs. Taxpayers will see tiered transition payments of between $300 and $1000 across 2010 depending on annual income and the number of dependants.

It should be noted, however, that it’s hard to pinpoint exactly what the HST will cost Ontario families. It will cost something but exactly what is to be seen.

It seems to be accepted that families with incomes between $30,000 and 90,000 should see a net negative impact of no more than $100 whereas families with incomes of over 100,000 will see on average a $400 net negative impact.

Moreover, previous Canadian experiences with such a tax replacement tells us that cost levels, initially pushed higher by the implementation of the HST, will eventually return to pre-harmonization levels thanks to the reduction of consumer prices spurred by business savings. Or so was the case when the GST replaced the Manufacturer’s Sales Tax in 1991 it was met with an eventual price decrease (though not an immediate one), and so too do early results from the introduction of the HST in Atlantic Canada.

Therefore, the crux of the HST debate is this – assuming that decreases in the costs of operating a business in Ontario are indeed linked to future investment and job creation (as noted in Jack Mintz’s report on the HST) – then are future jobs and a more competitive Ontario economy worth an annual payment of $400-500?

While I understand the apprehension most feel towards such a low-immediate-return policy, at some point it falls to those who govern to ensure that we build prosperous communities in both the short-and long-term. And I for one strongly support this initiative as a means of enabling business competitiveness in Ontario and subsequently ensuring an attractive climate for investment and job creation for today and tomorrow.

What obscures this debate is an Ontario Liberal government whose repeated promises of no new taxes, and failures to cut public sector spending, have created a massive disconnect with voters. Premier McGuinty, no matter his belief that the HST’s implementation is “the right thing to do for Ontario”, lacks much of the political capital necessary to implement such a controversial policy given he was elected on a no new taxes platform and has since schemed to add two.

Moreover, with a deficit that stands at $25-billion and is expected to run until 2017, the Ontario government can’t ignore the perception amongst many that it has failed to cut spending in line with need. And while I nominally agree with this statement, one can’t help but understand the current recessionary-environment and the desire to ensure that investment and innovation don’t suffer more than they already will given decreased private sector investment.

And while an abhorrence to taxation is understandable, across Canada we need to ask ourselves whether we want the level of public services provided to us for our tax dollars to resemble those in Scandinavia or those in Mexico and the US. For as it now stands, our level of taxation is much closer to the latter at 18-30 per cent of income than the former at 40-50 per cent.

We might think we pay too much tax, but in reality we’re far from being the most heavily taxed, and perhaps the services we receive suffer as a result.

And while one could equally argue that we don’t spend our tax revenues effectively, especially in light of scandals such as the e-Health fiasco, when nearly 50 cents on every tax dollar goes to health care, and a further 25 cents to education, it’s hard to find the kind of fat necessary to make a huge impact. Unless that is, we wanted to contemplate cutting public-sector wages, from teachers to doctors to civil servants. But neither McGuinty, nor any other current political leader, has the political capital nor the desire for martyrdom that such a move would require.

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