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.