Ontario’s great HST tax shift
There have been clouds and clouds of smoke generated about the impact of Ontario’s impending introduction of its Harmonized Sales Tax.Â Â Fortunately there is finally now some substance out there in terms of a detailed analysis conducted by Statistics Canada that was recently released by the Ontario NDP.Â And what is shows is quite surprising.
Much of the blame forÂ all the smoke about the impact of the HST lies with the Ontario government which wasn’t transparent about the distributional impacts of the tax when they announced it in their 2009 Budget.Â
This allowed politicians such as Conservative leader Tim Hudak to claim it was a massive tax grab when in fact it will lead to a revenue loss instead (and there’s been some of the anti-tax rhetoric coming from the Ontario NDP as well).Â Progressives who would like to see more government revenue have beenÂ hesitant to criticize it in fears of flaming the fans of anti-tax sentiment.Â Politically, it is also unfortunate that the major promoter of this tax shift of sales tax harmonization and cutting corproate taxes–former Ontario Conservative Finance Minister Jim Flaherty–hasn’t been seen as responsible for this.Â Â
Proponents of theÂ HST such as the ubiquitous corporate tax-cutter Jack Mintz claimed it will create close to 600,000 jobs in ten years, but based on what appears to be fairly simplistic and optimistic analysis.Â This was heavily promoted on the Ministry of Finance’s website, but it is hard to swallow these claims of hundreds of thousands of jobs being created from the investment impact of business tax cuts when it doesn’t seem to have happened with previous business tax cuts.Â Yet still the Ontario governmentÂ didn’t release any information on the distributional impact.Â Â
Last December, Ernie Lightman and Andy Mitchell released a report through the CCPA Not a Tax Grab After AllÂ with estimates from calculations they did using Statistics Canada’s SPSD/M model.Â This reported that most Ontario families would be better off overall as a result of the HST, together with the sales, property tax and personal income tax changes –and that lower income families would be proportionally better off.
This received considerable attention in the press, including a supportive editorial in the Globe and Mail, and was also heavily promoted by the Liberal government.Â However–and unfortunately–the report had some mistakes in a number of its calculations and had to be revised and republished twice.
Since then the Ontario NDP commissioned Statistics Canada to do an analysis of the impact of the HST, also using Statistics Canada SPSD/M model, but they had Statscan do theÂ calculations itself.Â What the results show is that the average family will be $470 worse off on average as a result of the HST and the sales, property and income tax cuts, or worse off by an average $316 if businesses pass through their savings into lowering consumer prices.Â Â Â The assumptions included in this analysis are outlined in the background document.Â Â Overall itÂ appears to be a good and transparent analysis conducted by what should be an accurate and impartial organizationÂ (Statistics Canada).
Those on the very bottom of the income spectrum, making up to $20,000 would be slightly better off on average by about $70, but all those with incomes above this amount would be worse off.Â Â So the tax package would appear to be on balance somewhat progressive in terms of income distribution. Â
However, this and other analyses do not take account of the impact of the corporate tax cuts, which will be worth over $2 billion a year when fully phased -in, which were very clearly part of the Ontario 2009 Budget tax package.Â
I’ve done some calculations of these, using shares of investment income and capital gains by income group, reported by both Statistics Canada and through the CRA tax files and some other sources.Â If we assume that businesses pass on their savings from the HST to consumers through lower prices, I think it is fair to say that reductions in corporate income taxes would flow through to the owners of the businesses.Â If only half of of these benefits flow through toÂ households in Ontario, then the picture is quite different.Â Â Â Â (About 28% of Cdn profits go to Canadian controlled corporations and I assumed that 1/3 of the remaining Ontario profits also flow out to people in other provinces)
Once you take account of the distributional impacts of the corporate tax cuts flowing through, the impact of this tax package is mildly progressive on the bottom end, but regressive in the middle to top end.Â Families with incomes of less than $30,000 are better off by an average of $20 to $80 a year, those in the middle income range from $40,000 to $100,000 are worse off by about 0.5% of their income level (~-$200 to -$400 a year).
However, those with family incomes of over $100,000 would, on average,Â be better off by about $365 a year after accounting for the all elements of the tax package since this group receives a disproprotionately higher level of investment and capital income.
So Ontario’s HST tax reform is not an overall massive tax grab, but it is a major tax shift –and it certainly isn’t all progressive.