Primer on Harmonization
In Ontario, British Columbia, Manitoba, Saskatchewan and Prince Edward Island there is a GST and a PST. Harmonization will replace this with a single harmonized sales tax.
The GST is what is known as a value added tax. Businesses are reimbursed for most of the GST that they pay on their purchases [“inputs”]. However, the PST payable on some inputs and capital investments is not reimbursed. The HST will function like the GST, therefore allowing companies to be reimbursed for the PST portion as well as the GST portion, essentially reducing their provincial tax burden. The argument is that taxes on capital goods should be avoided because they limit growth of capital stock and reduce the long-run growth of productivity and employment. With a harmonized sales tax, businesses would no longer pay taxes on inputs and capital investment. This would allow a Province’s businesses to be more competitive, attracting more investment from outside the province, encouraging businesses to invest more in capital and making a Province’s exports more competitive. This is what led Ontario to harmonize its taxes, a move that had already been made by New Brunswick, Nova Scotia and Newfoundland and Labrador in 1997. British Columbia, likely fearing increased competition from Ontario, has also decided to harmonize its taxes. However, Quebec was the first to reform its taxes in 1992 with the Quebec Sales Tax (QST). The QST employs a modified value added system, which at first only accorded limited input tax credits to firms. It has gradually expanded and its base has, for the most part, harmonized with the GST’s base as of 1995.
Provinces who still employ an RST, will likely feel pressure to harmonize their taxes to remain competitive with other provinces. There has been talk that Manitoba will harmonize its sales taxes as well.
CARP recognizes that tax harmonization has the potential for creating economic growth. However, it has been estimated that approximately 40% of the RST is generated by the taxes paid by businesses. If businesses no longer paying this, then there would be a sharp drop in governmental revenue. If tax reform is to be at least revenue-neutral, meaning that the government maintains its current level of income, then the taxes paid by consumers on their personal expenditures must rise. Currently, GST is paid on more items than the RST. In order to make up this revenue, the RST will adopt a similar base to that of the GST. The result will be an increase of 8% to the cost of products that are currently not subject to the RST.
This is harmonization’s ‘Achilles Heel’, the fact that it is a shift of the tax burden to the consumer. In response, the governments of Ontario and British Columbia have come up with ways to help consumers make the transition to the HST.
• Housing Rebate for homes under $500 000. For homes under $400 000 there would be a rebate of 75% of the provincial portion of the tax, with the rebate amount reduced for homes priced between $400 000 and $500 000;
• Ontario Sales Tax Transition Benefit of $1 000 for single parents and couples and $300 for single people, which would be reduced by 5% of the recipient’s net income over $80 000 for the single individual and over $160 000 for families, from the previous year. The benefit for single people is 3 payments of $100 (single people with income over $82 000 would not receive a benefit). For families it is one payment of $300 and two payments of $350 (families with income over about $166 700 would not receive a benefit);
• Ontario Sales Tax Credit will increase from $100/adult to $260/adult and to $50/child. It will be refundable and paid quarterly.
• Personal Income Tax Relief: Cutting the tax rate on the first tax bracket by one percentage point, from 6.05 to 5.05%, effective January 1, 2010;
• Ontario Tax Reduction would reduce or eliminate personal income tax by $205 per tax filer and $379 per child or disabled or infirm dependant.