Ontario Revenue Minister John Wilkinson

As the July 1 deadline looms for the harmonized sales tax (HST) to take effect in Ontario and British Columbia, many consumers there are upset about what they perceive as a tax grab that will see them pay on an additional list of services previously exempt from the existing eight per cent provincial tax in Ontario, and seven per cent in B.C.

This will be over and above the five per cent federal goods and services tax they are currently paying on many services, such as cleaning, haircuts, taxis, airport limousines, club membership fees — even certain professional services like accounting.

“You have a lot of anger and confusion out there because peoples’ first gut reaction is ‘previously I didn’t have to pay eight per cent; now I do,’” says Satinder Chera, director of provincial affairs in Ontario for the Canadian Federation of Independent Business. “Our members’ concern is that they, as the front-line service providers, are going to take that backlash.”

Ontario Revenue Minister John Wilkinson dismisses any notion of the HST as a provincial tax grab. “Initial money that is brought in by a broader tax base under the HST (will be) more than offset by permanent income tax cuts we’re providing for people and businesses. It’s some $15 billion worth of income tax relief over the next three years,” he says.

“Harmonization of the federal GST and the provincial PST into one sales tax is the single most important thing we can do to stimulate the economy and put us in a position where we’re going to have sustained growth on government revenues into the future. That will lead to sustained growth in the economy,” says Wilkinson.

Some worry, however, that introducing a new tax now might threaten a nascent economic recovery.

A sudden consumption tax hike of that magnitude “will have a big psychological impact that throws a roadblock into our progress towards economic recovery,” predicts Mel Fruitman of Maple, Ont., vice-president of the Consumers Association of Canada.

Iglika Ivanova, an economist with the Canadian Centre for Policy Alternatives in Vancouver, also worries about the HST’s potential for derailing a fragile recovery. “I’m concerned that (when) people have to pay higher prices, overall consumer spending is going to fall in the second part of the year, and that will be problematic in terms of trying to recover from this recession,” she says.

Arguments that an economic recovery will be negatively affected are “totally mixed up,” counters Richard Rees, the Vancouver-based chief executive officer of the Institute of Chartered Accountants of British Columbia.

“We’ve been a strong advocate for an HST and elimination of the PST for two decades,” stresses Rees. “Adopting the tax will do a lot to make the fundamental businesses and industries of British Columbia more competitive. Enhancing economic competitiveness at a time when the economy is struggling can only be a benefit.”

One of the key economic arguments touted by those supporting the HST is that it, like the GST, provides input tax credits to offset taxable goods and services at all stages of the distribution process. In contrast, a retail sales tax accumulates at various stages during this process and is embedded in the final price as the seller tries to recoup their costs.

“We think the government has undertaken a wonderful tax policy initiative. Many studies have shown there are significant benefits in terms of streamlining the tax compliance process and removing embedded tax on costs,” says Ted Wigdor, vice-president of government and corporate affairs for the Certified General Accountants of Ontario in Toronto.

John Winter is president and chief executive officer of the British Columbia Chamber of Commerce in Vancouver, which had been calling for a provincial HST since 2002. Winter expects the HST to bring multiple benefits to B.C., including extensive net savings to business. He also anticipates that competition will force businesses to pass on those savings to customers.

Based on past experience, there is good reason to believe consumers will benefit, says Don Drummond, senior vice-president and chief economist at TD Bank Financial Group in Toronto. He points out that full cost savings were passed through in 1991 with the federal GST; as well as provincially when Quebec harmonized in 1992, and when New Brunswick, Nova Scotia, Newfoundland & Labrador harmonized in 1997.

“It’s not just wishful thinking; we’ve actually got three live examples where it did work,” Drummond emphasizes.

Winter expects that forestry, which had already been experiencing a slowdown before the recession, will be one of the key industries in B.C. to benefit. “The forestry industry thinks this is going to save their bacon in the short term. This is a lifeline that will buy them more time till they fix the real problems in their industry,” he predicts.

Winter concedes, however, that other provincial sectors which are not currently charging retail sales tax for their product or service, and will now have to collect an additional seven per cent under B.C.’s HST, are deeply concerned. The hospitality and food services industry in particular fears this will drive up their cost of doing business, reduce volumes, scare away customers and cost jobs, he says.

Ivanova explains how the HST can impact industries differently.

“The HST benefits businesses by providing credits for the tax they paid on their inputs, which lowers their costs of investment.

'In the service sector, however, the main business input is often labour, which isn’t subject to sales taxes, so the HST offers little savings to restaurants and personal service providers like hairdressers,” she says.

“About 70 per cent of the B.C. workforce is service-based, working in sectors such as retail and hospitality. Those industries will be hit hard by the HST, in contrast to goods-producing sectors, such as construction, forestry and mining, who are expected to realize substantial savings,” Ivanova adds.

Ontario, which has shed thousands of jobs from its traditional manufacturing base during this recession, also has a growing percentage of service industries that could be negatively affected by an HST, notes Chera.

Another key argument by those in favour of the HST is that some businesses will incur significant administrative cost savings as a result of only having to fill out one federal tax return, and face a single federal audit.

TD Economics estimates there will be combined savings in excess of $7.5 billion annually in Ontario and British Columbia, including $6.9 billion as a result of a reduction in the amount of taxes paid on inputs by business, plus another $650 million courtesy of reduced compliance costs.

“You have to have a competitive tax structure if you want Ontario and B.C. to thrive in the future, and the retail sales tax was an extremely uncompetitive structure. You’ve got to get rid of it. There’s no denying there are some tricky issues in the transition, but there’s no perfect time to do that,” says Drummond.

The HST will “certainly make them more competitive. It should lead them to be more capital intensive, and I would argue that our lack of capital intensity is a prime reason why we’re less productive than the United States; hence why our real wages are lower,” Drummond says.

Both provinces are offering tax packages of recently updated HST relief, including a number of point-of-sale exemptions on items such as books, children’s clothing and footwear, diapers, child car and booster seats, and feminine hygiene products, among others. B.C. also offers point-of-sale rebates for residential energy costs. Partial rebates for the provincial portion of HST are also available for new homes in both Ontario and B.C.

“Under our memorandum agreement with the federal government, we have the ability to provide exemptions for up to five per cent of the tax base in regard to the provincial portion (of HST),” explains Ontario’s Wilkinson.

“That has allowed us to maintain point-of-sale exemptions on (some) items that are currently exempt under the PST. If you are not going to have a tax on those items, the most efficient way to do it is at the point-of-sale,” he says.

There is, however, some debate as to whether point-of-sale exemptions represent the optimal solution.

“Those exemptions were added with the idea that low income people spend a higher percentage of their income on things like heating their house, and transportation. If you exempt those items, then it will mitigate the impact this tax has on them. But I think it would be more effective to just provide tax credits based on income, like with the Canada Child Tax Benefit, to those who need it most,” says Ivanova.

Drummond would also like to see any income distribution be handled through the tax credit system. Exemptions limit the effectiveness of the HST as an economic tool, just as they did when the GST was introduced in 1991, he says.

“The biggest problem with the GST is (it) had a whole bunch of special treatments all over the place, and they’ve all caused a lot of problems in the sense they’ve watered down and made the tax less effective. But I still think it’s worthwhile to do. As a practitioner, you’ve got to say ‘I guess the politicians have to evaluate what’s going to be required to get the tax passed; so let’s try to minimize the compromises required in order to get it done,’” Drummond adds.

Both Ontario and B.C. are offering billions of dollars in GST concessions.

Wilkinson insists that such concessions are not compromising Ontario’s finances at a time when the province is running record deficits and needs to repair its long-term fiscal situation.

He says Ontario’s tax reform package, including implementation of the HST, will assist on the revenue side by providing new jobs whose recipients will ultimately contribute more taxes, as will their profitable companies.

“To help the private sector get people back to work, we are eliminating an entire layer of bureaucracy of taxation by way of the current retail sales tax, which is not a modern, efficient tax system,” Wilkinson stresses.