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The Progressive Economics Forum

HST Revenue Loss

Public debate in Ontario tends to frame sales-tax harmonization either as an unjustified “tax grab” or as a needed contribution to the deteriorating provincial budget.  Both views incorrectly assume that the HST will increase government revenues.

In fact, the original proposal was more or less revenue neutral. Removing sales tax from business inputs and cutting personal income taxes would have offset the additional sales tax on consumer purchases.

But the Ontario government has backed off extending the provincial sales tax to newspapers, prepared foods and beverages under $4, and the first $400,000 of new-home purchases. As the tax cuts on business inputs and personal incomes proceed, “harmonization” will appreciably reduce provincial revenues. And this reduction is in addition to deep provincial corporate tax cuts.

I made this point a week ago, when I appeared before the Ontario Legislature’s Standing Committee on Finance and Economic Affairs. The transcript is now available. A lightly edited version of my testimony follows.

I would like to make three points in my testimony. First, I will address how Bill 218 will affect provincial revenues. Second, I will examine how the business tax cuts in the bill will or will not affect the provincial economy. Third, I will discuss how sales tax harmonization will affect pension and benefit plans in Ontario.

The most controversial aspect of sales tax harmonization has been the application of provincial sales tax to a wider range of consumer goods and services. There is a legitimate concern that consumption taxes are regressive. But I think that an even more important concern is how the proceeds will be used. If additional revenue from consumption taxes were invested in public programs, the progressive effect of those programs could offset the regressive effect of the consumption tax.

In fact, as I have said previously in front of this committee, I would support higher provincial taxes to fund improved public services. However, it is important to note that Bill 218 does not actually provide more revenue. The 2009 provincial budget indicated that the sales tax changes would generate an additional $2.2 billion annually. However, the personal income tax reductions and credits to compensate for those sales tax changes will cost $2.3 billion annually. Recent concessions on prepared food and real estate will cost the provincial government a further $0.6 billion annually.

So, the whole harmonization process will actually reduce provincial revenues available for public purposes by approximately $0.7 billion per year. On top of that, Bill 218 enacts corporate tax cuts that will cost a further $2.3 billion per year when fully implemented in 2014-15.

This budget legislation amounts to a transfer of $3 billion from the public purse – and billions more from Ontario consumers – to the corporate sector. This huge gift to Bay Street is justified by the claim that it will increase investment and employment in the province.

In particular, Jack Mintz has garnered a great deal of attention by claiming that Bill 218 will create 591,000 new jobs. To put that number in perspective, employment in Ontario has declined by 179,000 since October of 2008. Mintz is claiming that the tax breaks in Budget 2009 will create more than three times as many jobs as were eliminated by the worst economic crisis since the Great Depression. I am skeptical of that claim.

Mintz arrives at the 591,000 figure by combining a large projected increase in capital investment with two unsupported assumptions. First, he posits a fixed ratio of labour to capital, so that employment income must automatically increase by the same proportion as capital investment. Second, he assumes fixed wage rates, so that the entire increase in employment income must represent additional jobs. Even if one were inclined to accept the projected increase in capital investment, one should not believe the projection of 591,000 new jobs.

Putting that figure aside, there are specific reasons to doubt the projected increase in investment. On the issue of corporate tax cuts, Premier McGuinty was extremely articulate and effective in refuting federal demands for provincial corporate tax cuts until Budget 2009. I will not repeat the Premier’s excellent arguments against corporate tax cuts, but I will add one more. The paper circulated to this committee explains that much of Ontario’s corporate tax cut will flow not to enterprises operating in the province, but to the U.S. federal treasury.

Removing the sales tax from business inputs is also unlikely to promote additional investment in Ontario. The existing provincial sales tax already exempts most of the machinery and equipment that comprises major capital investments. Bill 218 will serve instead to remove provincial sales tax from building materials, office supplies and other intermediate inputs that are far less relevant to business investment decisions.

A better alternative to the across-the-board business tax cuts in this bill would be more targeted tax measures. For example, it would cost a few hundred million dollars to remove the remaining provincial sales tax that still applies to some machinery and equipment. So, simply removing the tax from those capital goods would be no more expensive than the proposed harmonization scheme.

Another targeted option would be an investment tax credit. Instead of providing no-strings-attached corporate tax cuts and removing sales tax from all business inputs, the provincial government would offer tax breaks proportionate to the amount a business actually invests in Ontario.

I will conclude by addressing how Bill 218 would affect pension and benefit plans in Ontario. Most of the administrative, actuarial and other services used by pension plans are not currently subject to provincial sales tax. However, they are subject to the federal Goods and Services Tax (GST).

Pension plans operated within a business receive input tax credits for GST paid on those services. But multi-employer pension plans, and benefit trusts separate from the business, must pay the 5% GST. Bill 218 will increase that cost to 13%, which is a deduction from the funds available to provide pension and other benefits to Ontario workers.

There are essentially two possible solutions. One would be to not enact Bill 218. The other would be to amend Bill 218 to make input tax credits available to multi-employer pension plans and benefit trusts, giving these entities the same treatment as single-employer pension plans.

Thank you.

Enjoy and share:

Comments

Comment from Brandon L
Time: December 15, 2009, 6:23 pm

Lol yes In fact, the original proposal was more or less revenue neutral. Removing sales tax from business inputs and cutting personal income taxes would have offset the additional sales tax on consumer purchases. i really dont get how the two majority veiws debating each other really dont undertand what here debating.

I however feel taxing consumption is less regressive then taxing the producers. The government needs to collect revenue when we spend money, not when we earn money. And it’s very simple. Just put a tax on every transaction. The rich will pay more than the poor because they spend more than the poor. There’ll be no tax evasion. There’ll be no underground economy. Everything will get taxed. But it encourages savings. So if you earn a million dollars and you don’t spend any of it, if you put it all in the bank, and therefore it’s available to be loaned out to entrepreneurs, you’re not going to pay any taxes. You’re not going to pay any taxes until you try to enjoy your money.

Comment from Brandon L
Time: December 15, 2009, 6:25 pm

Which is fine, because if somebody is earning millions of dollars and living in a little shack and not spending anything, he’s like a saint. He’s basically a benefactor. He’s just putting into the economic pot and he’s not taking anything out for himself. Why should you tax that guy? That’s better than charity.

Comment from George Keeming
Time: December 16, 2009, 10:29 am

The point of the HST is not to increase government revenue. It is designed to create jobs while cutting taxes for individuals and buisness.

A report by TD Bank estimates the HST will reduce cost of doing business in Ontario by roughly $5.3 billion and that the majority of these savings will be passed on to customers within the first year. In fact, the majority of items you purchase – 80 percent – will see no tax change at all.

A recent report by economist Jack Mintz confirms that Ontario needs to reform its tax system to create jobs and put Ontario back on its feet. It says, as a result of the HST, within 10 years Ontario would see:
o An estimated 591,000 additional new jobs
o Increased capital investment of $47 billion
o Increased overall annual worker incomes of up to 8.8 per cent, or $29.4billion

We have a choice: we can refuse to fix what’s broken, resign ourselves to the idea that Ontario will be less competitive or we can move forward and get the jobs Ontario needs.

Please visit: http://sites.google.com/site/thetruthaboutthehst/

Comment from Brandon L
Time: December 16, 2009, 3:41 pm

Im dubious to the claim it wont raise taxes and end up neutral. I’ll wait for the empirical data. However it does succeed in lowering the cost on business while this might not make corporations hire because it doesn’t change their bottomline to warrant drastic shifts. The hiring will be from small business which hire the majority of workers in Canada, are able to expand more since their companies have room to grow unlike brand name corporations.

My cousin lost his job with 45 others because the employers ask the municipality cut their property tax. The local government declined but guess what the pulp mill in Campbell River BC is gone, they get no revenue.

No one can tell me my Cousin is better off now that his municipality made that choice. Which brings me to sheardowns he got last week temp job is now closing, pretty much similar scenarios. The local population is angry with the municipality & will probably elect who ever has a platform for lower taxes.

Comment from GE
Time: December 17, 2009, 9:45 am

Raising taxes during a recession…. and I don’t care what you pseudo-“economists” say, the HST is a tax INCREASE for the middle to lower-middle classes.

Raising taxes during a recession is an unforgivable sin. When Bush Sr. did this in the early 90s, it ruined his career as a president.

I voted for McGuinty the first time because he was against the suicidal money for madrassas that the “conservatives” were pimping.

In this country, McGuinty will be applauded as a savior and genius, because Canadians are either that retarded or apathetic, or both.

Comment from D GAULT
Time: December 18, 2009, 3:02 pm

I DO NOT BELIEVE FOR ONE SECOND WHAT JACK MINTZ HAS TO SAY. HE SOUNDS LIKE A SCHOOL OF BUSINESS ECONIMIST, NOT A SCHOOL OF ECONOMICS ECONOMIST.
IF THESE SO CALLED 600,000 JOBS ARE SUPPOSED TO BE CREATED HOW COME IT DID NOT HAPPEN IN QUEBEC AND THE MARITIMES?

Comment from Carl
Time: January 9, 2010, 5:19 am

I have read your comments as well as the comments made by the so called economist. There are some basic dichotomys at work here and have been for some time.We have been blending a socialist model with competitive model. The former proports to make overall society supposedly better off and share the wealth . This is a wonderful hypothesis but if you take a look everwhere in the world “It doesn’t work” simply because there is no incentive to work or to be creative.It is never enough for one side and always too much for the other. We are rapidly approaching the net zero point . What’s the point of taking risks,making investment working all kinds of hours to have someone tax it away ,or take it away with laws that support the underdog mentallity. We have to take a serious look at wealth distribution before there is nothing left to distribute. The so called middle( working class) is all but gone. T4’s are easy to track. Hey you unionists, that is you. You guys in your focus with the “company” assisted in having you life style eroded to obscurity. When those guys made money so did you.You were working,which is now a four letter word. The work force is now much smaller and more demands on it. Now it is the multy nationals at fault. . Bottom line in any sustainable ecomomic model is you can’t spend more than you make or it won’t last. Our income side is decreasing and spending is increasing,hence a new tax. I am always amazed to pass a mall during a working day to find the parking lot withscores of vehicles,Where do they get the time and money. The answer is obvious ,the working stiff.They don’t have the time to lobby and plead there case for special treatment. Every one is special any more except the people paying the bill. The whole thing is lobsided and the only one to take exception would surely be on the take side. Lets see.

Comment from stephen
Time: February 7, 2010, 9:36 pm

Can projected shortfalls to application of the HST cause public programs to be cut?

Comment from lynn raymond
Time: March 12, 2010, 9:34 pm

Since becoming aware of bill 218, I’ve given considerable thought to the impact it is going to have on the majority of Ontarians and quite frankly, it scares me.

Is our premier even thinking? At a time when the majority of us are finding it challenging to meet our monthly expenses, we are faced with the prospect of paying a 13% tax on almost all the goods and services that we purchase.
My mind goes to those barely making ends meet, the elderly on meager pensions, and I wonder, will they be able to keep their homes? Will they be able to maintain healthy diets? Will they be able to afford heat during the cold winter months? I’m not encouraged by the answers.

Let’s look at the HST from a different perspective. Raise your hand if you’re in line for a 13% salary increase this year. How about and 8% raise? Exactly. Most of our wages have either remained static or if we’ve been lucky, perhaps we’ve received a 1% -3% raise. How is that equitable? Polls have shown us that real income has been steadily declining.
Where are we to find the extra 13%?
In my opinion, bill 218 is very wrongheaded. However, if it must be implemented, let’s hope that the Ontario Liberals come to their senses and prune the bill back so that it becomes more fair and much less painful for all of us.

Comment from paul young
Time: March 16, 2010, 10:31 am

HST is supposed to be revenue neutral. However, i have bigger concern then just taxes and that is how taxpayer’s money is being spent. We have already seen that healthcare sector is no better then it was 15 years ago and yet we are paying a health premium tax. How about the e-health scandal were the project exceeded the $1B threshold. So, where are the govt audits around value-for-money and were is the accountability for how tax money is spent. Politicians only care about one thing and that is themselves and do very little movement until its election year and then they promise you the world.
Govt needs to be run like a business and not as if it has unlimited funds. I am for the new version of the common sense revolution and we need to look at better ways to provide services to the residence of Ontario.

Comment from cp
Time: March 16, 2010, 5:28 pm

For anyone who thinks this tax is revenue neutral, I studied my budget, and used the reduction in income tax scale from the DM government. Conservatively figured, with the same income as present, and the increased costs to necessities, It will cost me an additional 250.00 dollars first year, and that is allowing for the 300.00 dollars in rebates for the FIRST YEAR only. Therefore I can only imagine how raising taxes in the middle of a depression is an excellent idea, that only a government that has run up a 25 billion dollar deficit could appreciate. This procedure and this government must be stopped.

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