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. Â Both views incorrectly assume that the HST will increaseÂ 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.Â AsÂ 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 Legislatureâ€™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.