The Ontario economy was a sinking ship, recession or not.
Once Canada’s richest province, both in terms of overall size and GDP per capita, Ontario is now eligible for equalization payments – transfers reserved for the have-not provinces – beginning this year.
Increased foreign competition in key industries, such as the manufacturing sector, has contributed to Ontario’s decline. Now faced with a recession, the province has been forced to confront its mounting economic woes.
The federal Conservatives and the Ontario Task Force on Competitiveness, Productivity and Economic Progress have recommended sales tax reform as a way to bolster the economy.
A uniform sales tax would make businesses more competitive and strengthen the economy.
Premier Dalton McGuinty is reconsidering harmonizing the PST and GST, after originally scrapping the idea last November.
Instead of paying separate provincial and federal sales taxes on goods and services, customers would pay one, harmonized sales tax or HST.
The complexity of the current tax regime in Ontario creates significant compliance costs for businesses, says Ian Lee.
Lee, the MBA director at Carleton University’s Sprott School of Business, says a harmonized sales tax would reduce this burden.
“It cuts red tape,” he says.
Under Ontario’s current system, businesses have to file two sets of taxes each month, one to the provincial agency and one to the federal agency. A harmonized sales tax would force Ontario to adopt federal rules, says Lee.
Manufacturers would enjoy additional savings because the capital purchases, such as equipment, that now carry a PST charge would be fully exempt under a new system.
And not only businesses stand to benefit. Lower costs would promote investment and boost productivity, which would spell higher wages and new jobs.
Lee favours any move that might prevent further job losses in Ontario. He says 75 per cent of business expenses, on average, are devoted to salaries. Since businesses can’t choose not to pay taxes, any money spent on filing returns with two levels of government every month is money that can’t be spent on labour.
Last year, the C.D. Howe Institute reported that it expected capital investment to increase by roughly $36 billion if the tax burden was lifted. The PST, as it’s used now, raises the cost of this type of investment.
Harmonization would also make Ontario businesses more competitive with foreign competitors who operate under simpler tax regimes.
Critics say making the switch to a harmonized sales tax would lower provincial revenues. However, when Quebec and the Atlantic provinces harmonized their provincial sales taxes with the GST, the federal government offered financial assistance. Since the Harper government supports this style of tax reform, it would likely offer Ontario the same.
Any dip in provincial revenues would only be temporary because as the harmonized tax was applied to a broader range of goods and services, revenues would increase over time. A liberally applied sales tax also presents the opportunity to lower the overall rate. Instead of combining the five per cent GST and the eight per cent PST for a harmonized sales tax of 13 per cent, the rate could be lowered to 12 per cent.
This might be a good option, since McGuinty is worried about price increases for household goods that are PST exempt.
Opponents of a harmonized sales tax also identify higher prices, which would hurt low-income households the most, as a deal breaker.
When Quebec and the Atlantic provinces made the transition to a harmonized sales tax, consumers found themselves faced with higher prices on goods and services that had previously been exempt from their provincial sales tax. Lee says the rise in prices didn’t exceed the value of the old retail sales tax.
A lower overall tax rate would help cushion consumers from feeling the effects of higher prices on certain goods and services.
A recent report commissioned by the Ontario Chamber of Commerce reveals that the province can take steps to offset the price increases that would disproportionately affect low-income households. The provincial government could offer sales tax credits to those it deems are unfairly affected by the change.
McGuinty has been reluctant to entertain a harmonized sales tax until now even though most economists agree that such a move would make sense.
Lee says sales tax reform may be viewed as a tough sell politically but he points out that “most taxpayers are workers.”
Not only would the harmonization of Ontario’s PST with the federal GST help to minimize job losses amidst the recession but the overhaul would see a strengthened economy after the storm has passed.