A couple of days ago, I took part in a TV Ontario panel about sales-tax harmonization.
I emphasized a couple of points that will be familiar to readers of this blog. First, harmonization is unlikely to have much effect on capital investment because many capital goods are already exempt from the existing provincial sales tax.
Second, if the principle is to tax business profits rather than business inputs, the removal of sales tax from business inputs should be combined with a corresponding increase in the corporate tax rate on profits. But the Government of Ontario is doing the opposite: slashing its corporate tax rate from 14% to 10%.
A couple of times on the program, Don Drummond said, “everybody else is moving/going to 10%.” However, only three other provinces – BC, Alberta and New Brunswick – have enacted 10% corporate tax rates.
According to KPMGâ€™s summary, scheduled rates for 2011 are 12% in three provinces (including the two that border Ontario), 14% in Newfoundland and Labrador, and 16% in the remaining two Atlantic provinces. The only other planned corporate tax cut is Manitobaâ€™s eventual goal of 11% when finances permit. By announcing a 10% rate, Ontario is leading rather than following this race to the bottom.
Another point that this discussion underscored for me was how little fiscal information we have about harmonization. The government has offered no estimate of how much additional revenue it willÂ raise by adding provincial tax to a range of consumer goods and services. Similarly, it has provided no breakdown of how much revenue will be lost by exempting different types of business inputs.
Michael Smart and Richard Bird estimated such figures using 2002 input-output data and assuming complete harmonization with the GST. Whatever the HSTâ€™s merits or demerits, it is strange that Ontarioâ€™s Finance Ministry has not provided more current numbers based on the proposed incomplete harmonization.
The provincial budget indicated only that the sum total of these tax additions and tax exemptions will be an extra $2 billion of annual revenue. The provincial government will temporarily gain a further $1 billion of annual revenue by continuing to tax some business inputs.
After the budget, the media reported that business would save $3 billion per year immediately following harmonization. Summing these numbers implies that consumers will be paying an additional $6 billion annually.
On TVO, Len Crispino from the Chamber of Commerce said that Ontario business currently pays $5 billion per year of sales tax on inputs. Adding the HSTâ€™s net revenue increase of $2 billion implies that consumers will be charged $7 billion more each year.
Of course, there is a case to be made that $6 billion or $7 billion of additional consumer costs is a price worth paying to encourage more business investment in Ontario. (I would question this case on the grounds that many capital goods are already exempt from provincial sales tax.)
It is probably true that some business tax savings on inputs will be passed through to consumers as lower pre-tax prices. Therefore, the net increase in after-tax consumer costs will likely be less than $6 billion.
TD Economics, which assumes an extremely high degree of pass-through, estimates that the HST will increase consumer prices by 0.7% in Ontario. Given annual consumer spending of almost $350 billion in the province, that estimate suggests a $2.5 billion cost to consumers.
Obviously, the additional cost must be at least $2 billion because the government will collect that much additional revenue. (Suggestions that harmonization could actually lower consumer prices seem to posit that businesses will pass-through substantially more than 100% of their savings.)
However, to have a serious debate about the HSTâ€™s ultimate economic incidence, one would first need figures on its initial statutory incidence. So far, the Ministry of Finance has not provided any.