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The good, the bad and the ugly about the HST

0 2066 Market Intelligence

Alex Carrick

Positions:
Alex Carrick is Chief Economist for Reed Construction Data. He specializes in economic forecasting and statistical services.

Economists

As of July 1 2010, the basket of goods and services covered under two provincial sales tax regimes will be stretched much wider. The cause will be a shift to harmonized sales taxes (HST) coordinated with the federal government. What I don’t like about the harmonized sales tax is also what I do like about it. It’s a tax grab. Let me explain.

As of July 1 2010, the basket of goods and services covered under two provincial sales tax regimes will be stretched much wider. The cause will be a shift to harmonized sales taxes (HST) coordinated with the federal government.

The HST will be collected by Revenue Canada and the appropriate proportions remitted to the provinces of Ontario and British Columbia.

Federal goods and services tax coverage (GST) is broader in scope than present provincial sales taxes. Therefore, the new HST will be more wide-ranging in its application.

The federal goods and services tax rate is 5%. Existing provincial sales taxes (PSTs) will be added on top.

The new HST in Ontario will be 13%. In B.C., it will be 12%.

Ontario and B.C. account for slightly more than half of the nation’s gross domestic product (GDP).

On the same day, the existing HST in Nova Scotia will move up from 13% to 15%.

What I don’t like about the harmonized sales tax is also what I do like about it. It’s a tax grab.

Governments everywhere need more money. That’s federally, provincially and at the municipal level in Canada. It’s also true in Washington and in the states and cities south of the border and in almost every other jurisdiction around the world.

This is the fallout from massive government spending programs to stimulate economies out of recession.

In Europe, the push is on to wrestle government deficits and debt under control by raising VATs (value-added taxes, similar to the GST), cutting public sector staffing and wages, extending retirement dates further into the future and restructuring labor markets.

The U.S. is gently tackling the issue by letting tax breaks for wealthy income earners expire. But much more needs to be done. It is not clear that significant progress will be made any time soon, with mid-term elections coming this November.

A number of U.S. states (e.g., California) have been poking and prodding at the bankruptcy bear and Washington is running a trillion dollar deficit. Unpopular steps will eventually need to be taken.

Ontario is making the shift to the HST more palatable for voters by issuing “transition cheques.” This is providing extra consumer spending with one hand while taking it away with the other. Nonetheless, it is proving effective in keeping opposition relatively quiet.

Ontario has the timing right, with a relatively neutral impact in the short term while the economy is still recovering, and the more significant drag being delayed until more prosperous times have returned.

In B.C., where there will be no transition cheques and there is a history of political activism, the outcry has been much more vigorous. Petitions are being signed and demands for a referendum on the HST’s introduction have gained considerable support.

There is also the argument the governments and many manufacturers make that under the old system, producers were stuck paying provincial taxes in areas where foreign competitors received a bye. These added to Canadian producers costs and raised their prices.

Now, due to the pass-along component of the GST, manufacturers’ costs should come down. This will make them more competitive versus imports and will lower the general price level.

There will be lower prices as a result of the HST? Who among the general population isn’t skeptical? Time will tell.

What I don’t like about the HST is that it’s a tax grab. If it’s in any way visible or comes to the attention of the public sector, it will be taxed.

There are not just normal taxes anymore. There are surcharges on taxes. This applies with respect to health care in Ontario. It applies to drivers’ license plates in Toronto. In many jurisdictions, there are extra charges for garbage collection and recycling bins. The list is long and growing.

Government intrusion into all phases of everyday life has become extensive and expensive for all private citizens.

The phrase “tipping point” has entered the common vernacular. Such a moment seems close at hand.

Politicians might as well know this. There may be a backlash. That’s the ugly part.

Alex Carrick

Find Canadian construction-related economic articles in Canadian Construction Market News and in the Economic Outlook section of Daily Commercial News. Mr. Carrick also has a lifestyle blog that can be reached by clicking here.

by Alex Carrick

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