Hot! HST: That didn’t hurt much

TheStar.com – opinion/editorialopinion
Published On Sun Mar 20 2011.    Michael Smart

Ontario’s new harmonized sales tax (HST) is not yet 9 months old, but already there is speculation that Tim Hudak and the opposition Progressive Conservatives will be promising a cut in the HST rate during next fall’s election.

Let’s hope they think twice. A cut to the HST would take Ontario in the wrong direction. For one thing, it would be expensive. Reducing the rate even one point would cost over $2.5 billion in revenues, at a time when Ontario is facing ongoing annual deficits of more than $15 billion.

For another thing, cutting the HST is a solution in search of a problem. The HST reform was a change in the way we tax, but it wasn’t a tax grab and it did not change people’s overall tax bills very much.

The HST replaced the old retail sales tax at the same 8 per cent rate. So most things are taxed exactly the same as before. But HST also covers some goods and services that were exempt from the old tax, such as home repairs, some utility bills, cigarettes and gasoline.

No one likes paying additional taxes, but the extra coverage is small. Besides, having a broad tax base is fairer to everyone and it helps keep the tax rate low.

At the same time, the HST actually removes a lot of taxes that businesses were paying under the old system for things like computers, telephones, transportation, construction inputs and much more.

Taxing business purchases makes no sense. It’s just a hidden tax that raises production costs and gets passed on to consumers through higher prices. It also reduces exports, and it hurts the investment and productivity of Ontario employers.

That doesn’t mean the HST just shifted taxes from businesses to people. The question is whether those business-tax reductions are getting passed on to consumers through lower prices, and if so, how quickly?

To find out, I looked at how consumer prices have changed in Ontario since the HST was introduced. To isolate the effects of the tax, I compared price increases in Ontario and Quebec, which did not change its tax but which is affected by most other drivers of inflation in the same way as Ontario.

According to Statistics Canada data, consumer prices rose 0.9 per cent last July due to the reform, showing that the new taxes applied to a fairly small part of consumer spending. By December, the impact on prices had fallen to 0.6 per cent.

The gradual decline in the tax impact reflects the way that input tax credits are being passed on to consumers, and how competition is leading businesses to absorb part of the tax. This pattern has happened for a number of different purchase categories.

For example, gasoline prices rose sharply in Ontario when the new tax was introduced. But by December, prices had only risen 4 per cent more than in Quebec. So about half of the tax has been absorbed by sellers so far.

In other cases, the news is not so good. The price of alcohol served in bars and restaurants is up 3 per cent, even though the government’s revenue was not increased. But the tax structure did change, and restaurateurs appear to have increased their profit margins as a result.

So overall the HST has increased the cost of living slightly.

But other tax changes have cushioned the blow, especially for the neediest families. The tax rate on low to middle incomes was reduced, and the sales tax credit for low-income people was increased, especially for seniors.

And all but the wealthiest families are receiving “transition” cheques totalling $1,000 on a one-time basis.

Taking all these changes into account, I estimate that the reform has cost the average family about $120 per year, based on December prices. That impact is likely to fall as the input tax reductions continue to be passed on to consumers.

To put that number in perspective, recent estimates from the Parliamentary Budget Officer suggest that federal plans to purchase new fighter aircraft will cost taxpaying families almost twice that amount on average for a period of 30 years.

On balance, the HST changes are a small price to pay for a better, simpler tax system that will increase the investment and productivity of Ontario businesses.

Michael Smart is a professor of economics at the University of Toronto. His paper was published by The School of Public Policy at the University of Calgary and can be found atwww.policyschool.ca/publications

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