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HST and Manufacturing

Advocates of the Harmonized Sales Tax often suggest that it will support Ontario’s beleaguered manufacturing sector. They emphasize that the current Provincial Sales Tax applies not only to finished products purchased by consumers, but also to some inputs purchased by businesses. As one business sells components to another, sales tax could be paid repeatedly along the supply chain.

This “cascading” tax allegedly weighs heavily on manufacturing, where multiple stages of production are frequently divided between different firms. The implication is that the Harmonized Sales Tax’s input tax credits for business will be a particular boon to manufacturers.

I have always been sceptical of this claim because the existing sales tax already exempts almost all of the machinery and equipment used in manufacturing. Ontario’s Tax Plan for Jobs and Growth, a fascinating (if obnoxiously titled) document released by the provincial government late last year, confirms my scepticism.

Table 2 indicates that, when fully implemented, the input tax credits will give $4.5 billion per year to businesses. Manufacturers will receive $510 million, 11% of the total.

By comparison, the most recent Statistics Canada figures indicate that manufacturing accounted for 17% of Ontario’s Gross Domestic Product in 2008. So, the Harmonized Sales Tax will provide disproportionately little benefit to manufacturing.

Construction companies will collect most of the input tax credits: $2.3 billion out of $4.5 billion. Building materials are indeed the main business input currently subject to Provincial Sales Tax.

Construction is an important part of the economy and has been hit by the recession. However, focussing tax breaks on construction companies is a strange approach to competitiveness.

By its very nature, construction is a locally-oriented business sheltered from external competition. Construction must occur where the building will be located. It is not feasible to construct buildings in other jurisdictions and import them to Ontario. Construction activity depends on the demand for buildings in the province, rather than on whether Provincial Sales Tax applies to construction materials.

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Comments

Comment from Travis Fast
Time: February 1, 2010, 5:26 pm

Erin did you not get the memo? Your not supposed to care if it is true or not.

If your doing more than 2000$ in renos in Ontario, spend the 250$ and become a contractor.

Comment from David
Time: February 1, 2010, 10:25 pm

Interesting analysis of the tax — thanks Erin. Like you, I’m skeptical whether HST will have much of an effect or if it’s more just an unglamorous measure to reduce transaction costs for businesses and governments by consolidating tax collection.

Comment from Iglika Ivanova
Time: February 2, 2010, 3:24 pm

You make a good point about construction, Erin. The situation in BC is quite similar, according to BC government’s estimates on which sectors will benefit the most:

– $140 million removed from the forestry sector
– $80 million removed from the mining, oil and gas sector
– $210 million removed from the transportation sector
– $880 million removed from the construction sector
– $140 million removed from the manufacturing sector

I also agree that demand is likely to be a much stronger determinant of business investment than the sales tax structure. An interesting point that Michael Smart made in a Vancouver presentation recently is that value added taxes (like the HST) do not reduce the cost of doing business per se, they reduce the cost of new investment. So we should be seeing more capital-intensive production and higher productivity as a result, rather than simply more production or more jobs. In fact, I haven’t seen any empirical research at all on the employment impacts of a switch to HST (well, except for Jack Mintz’s stuff, but I’m not sure where he gets his numbers from).

A case could be made for the tax benefiting export industries, which are currently struggling with a high Canadian dollar and weak US (and global) demand, but then do we really want to structure our economy around mining, oil and gas and exporting in general, given the carbon tax?

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