National Post editorial board: Is this really the best time for Ontario to harmonize its sales tax?
Posted: March 25, 2009, 10:23 PM by Ron Nurwisah
Posted: March 25, 2009, 10:23 PM by Ron Nurwisah
Filed under: Editorial
The trouble with consumption taxes — such as provincial sales taxes and the federal GST — is that economic theory and political reality are out of sync: Economists love these taxes because their effect is transparent, and they permit consumers to control the amount of tax they pay by controlling how much they spend. But consumers themselves take a more emotional view. Unlike payroll and income taxes, sales taxes hit consumers in the face every time they buy something — which is why they are so hated, notwithstanding their popularity among eggheads. Thus the controversy over reports that the Ontario Liberals plan to harmonize their province’s sales tax with the GST in today’s budget.
While introducing a new form of sales tax may be justified on paper, doing so at the depth of a recession, when working families are already nervous, could easily spook consumers, causing them to postpone purchases — particularly big-ticket items — thereby worsening the current downturn in Ontario.
The big problem for harmonization advocates is the manner in which matching provincial sales taxes to the GST suddenly broadens the number of goods and services that are subject to provincial levies. Books, home heating oil and children’s clothing, for instance, are all currently exempt from Ontario’s 8% PST, but not from the GST. Since the GST cannot be applied differently in each province — it must apply to the same items all across the country — when federal and provincial sales taxes are “blended,” it is the PST that must change. So the day after Ontario’s tax is matched up with Ottawa’s, Ontarians will wake up to a whole range of goods that cost more because of the reformed tax (although, as noted below, that range of goods may turn out to be more narrow than one might otherwise expect)
Absent any special exemptions (again, see below) the most obvious effect on consumer behaviour would be in regard to new homes. A forecast two weeks ago by the Building Industry and Land Development Association (BILD) claimed that harmonizing federal and provincial sales taxes would add nearly $47,000 to the price of a new home in Greater Toronto and about half that amount in the rest of the province. These figures seem inflated to us, especially since homebuilders already pay PST on building materials and pass some or all of that amount on to consumers in the price of a finished home. The problem, though, is not the final price, but the irrational manner by which consumers respond to its additive components: The new, higher tax amount would be glaringly obvious, while the lower base price may not be. Voters often rebel against the perception rather than the reality of a tax change.
According to Finn Poschmann, vice-president of the C.D. Howe Institute, a Toronto economic think-tank, after the harmonization in 1997 of provincial sales taxes in Atlantic Canada with Ottawa’s GST, “overall consumer prices fell.” Competitive markets forced retailers to pass on to consumers the PST savings they gained rather than pocketing that part of the pre-existing retail price that consisted of manufacturing or wholesale sales taxes. But would Ontario consumers appreciate that they were beneficiaries of an “overall” price decline from two merged taxes?
Certainly, many Atlantic Canadians did not. Prices rose on housing, clothing, footwear and some foods while falling on “household operations, health and personal care.” If prices rise dramatically on big-ticket purchases or on goods and services people use every day, and fall only on out-of-sight purchases, most consumers will not recognize that they are coming out ahead overall. And that psychological perception is more likely to drive their buying decisions than all the statistics economists can muster.
Mindful of this, the Ontario Liberals reportedly are set to carve out a set of exemptions and special rules. Some items — including children’s clothes, books, certain hygiene products, and child car seats — will be exempt from the provincial portion of the harmonized tax. It is also reported that there will be no increase in taxes on new homes worth less than $400,000, and that middle- and lower-class Ontarians will get lump sum cheques of $1,000 to offset the effects of the tax.
All this will make the tax harmonization more politically palatable. But it will do so at the expense of the main virtues of tax harmonization: simplicity and universality. In the final analysis, we expect that most Ontarians won’t have their overall buying habits affected much one way or another. They will simply be wondering why it was necessary to advance this confusing and complex tax change at this sensitive economic time.
The trouble with consumption taxes — such as provincial sales taxes and the federal GST — is that economic theory and political reality are out of sync: Economists love these taxes because their effect is transparent, and they permit consumers to control the amount of tax they pay by controlling how much they spend. But consumers themselves take a more emotional view. Unlike payroll and income taxes, sales taxes hit consumers in the face every time they buy something — which is why they are so hated, notwithstanding their popularity among eggheads. Thus the controversy over reports that the Ontario Liberals plan to harmonize their province’s sales tax with the GST in today’s budget.
While introducing a new form of sales tax may be justified on paper, doing so at the depth of a recession, when working families are already nervous, could easily spook consumers, causing them to postpone purchases — particularly big-ticket items — thereby worsening the current downturn in Ontario.
The big problem for harmonization advocates is the manner in which matching provincial sales taxes to the GST suddenly broadens the number of goods and services that are subject to provincial levies. Books, home heating oil and children’s clothing, for instance, are all currently exempt from Ontario’s 8% PST, but not from the GST. Since the GST cannot be applied differently in each province — it must apply to the same items all across the country — when federal and provincial sales taxes are “blended,” it is the PST that must change. So the day after Ontario’s tax is matched up with Ottawa’s, Ontarians will wake up to a whole range of goods that cost more because of the reformed tax (although, as noted below, that range of goods may turn out to be more narrow than one might otherwise expect)
Absent any special exemptions (again, see below) the most obvious effect on consumer behaviour would be in regard to new homes. A forecast two weeks ago by the Building Industry and Land Development Association (BILD) claimed that harmonizing federal and provincial sales taxes would add nearly $47,000 to the price of a new home in Greater Toronto and about half that amount in the rest of the province. These figures seem inflated to us, especially since homebuilders already pay PST on building materials and pass some or all of that amount on to consumers in the price of a finished home. The problem, though, is not the final price, but the irrational manner by which consumers respond to its additive components: The new, higher tax amount would be glaringly obvious, while the lower base price may not be. Voters often rebel against the perception rather than the reality of a tax change.
According to Finn Poschmann, vice-president of the C.D. Howe Institute, a Toronto economic think-tank, after the harmonization in 1997 of provincial sales taxes in Atlantic Canada with Ottawa’s GST, “overall consumer prices fell.” Competitive markets forced retailers to pass on to consumers the PST savings they gained rather than pocketing that part of the pre-existing retail price that consisted of manufacturing or wholesale sales taxes. But would Ontario consumers appreciate that they were beneficiaries of an “overall” price decline from two merged taxes?
Certainly, many Atlantic Canadians did not. Prices rose on housing, clothing, footwear and some foods while falling on “household operations, health and personal care.” If prices rise dramatically on big-ticket purchases or on goods and services people use every day, and fall only on out-of-sight purchases, most consumers will not recognize that they are coming out ahead overall. And that psychological perception is more likely to drive their buying decisions than all the statistics economists can muster.
Mindful of this, the Ontario Liberals reportedly are set to carve out a set of exemptions and special rules. Some items — including children’s clothes, books, certain hygiene products, and child car seats — will be exempt from the provincial portion of the harmonized tax. It is also reported that there will be no increase in taxes on new homes worth less than $400,000, and that middle- and lower-class Ontarians will get lump sum cheques of $1,000 to offset the effects of the tax.
All this will make the tax harmonization more politically palatable. But it will do so at the expense of the main virtues of tax harmonization: simplicity and universality. In the final analysis, we expect that most Ontarians won’t have their overall buying habits affected much one way or another. They will simply be wondering why it was necessary to advance this confusing and complex tax change at this sensitive economic time.
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