Leave the HST alone

NationalPost.com – FinancialPost/FPComment – PCs, NDP shouldn’t mess with McGuinty’s tax legacy
Sep 8, 2011.   Jack M. Mintz

ith summer’s end, attention is now being paid to the election in Ontario, Canada’s most populous province. Tax policy is front and centre in this campaign, with each of the parties taking some quite different approaches.

The Progressive Conservatives are promising income splitting and reduction of the HST on home heating and electricity — more will be said below on the wisdom of these HST initiatives. The NDP is proposing job-killing proposals that would hike taxes on business investment and costs. The Liberals are looking to implement the last stages of their 2009 tax reform, promising an ill-advised but at least tiny tax cut for small businesses.

It is a bit amusing to watch the PC television ads characterize Dalton McGuinty, Ontario’s Liberal leader, as the “tax man.” The intention, of course, is to convey that McGuinty is another tax-and-spend Liberal. Some of that record is earned, with the health tax introduced in the first mandate and eco-fees on the same date that the HST was implemented (just what were they were ecologically smoking?).

But if I were McGuinty, I would be proud of the designation. The “tax man” had the guts to reform the sales tax in 2009 by replacing the antiquated, distorting and unfair provincial retail sales tax with the far-better HST. As part of the 2009 tax reform package, he dropped corporate and some personal tax rates and eliminated the distortions arising from differential tax rates on manufacturing, resource and other profits.

Other smart tax policies during his tenure include eliminating business capital taxes and harmonizing Ontario’s corporate income tax with the federal system, a major move towards simplification, resulting in low administrative and compliance costs.

Instead of having one of the highest effective tax rates on investment in the world, Ontario moved quickly to the middle of pack, with an effective tax rate on new investments halved to about 18% by 2013. The HST with an enhanced low-income sales tax credit will also be a more reliable source of revenue to fund public services with a more fair distribution of taxes across different types of consumers and income groups.

Sure, those who benefited from certain exemptions under the old sales tax complain about its replacement with the new HST. However, over time, the market will ensure scarce resources will be put their best use, not by some bureaucrat choosing which products should get special breaks.

If anything, Ontario in the last four years has got this part of the “tax reform” done well. Unlike the sad experience in British Columbia, the Ontario government got grudging political acceptance by putting together a smart reform package with broad public consultation. Tax reform is never easy to accomplish, but 20 years down the road, McGuinty will look like the “tax reform man,” accomplishing one of the most profound changes in Ontario’s history, a powerful way to spur growth and productivity.

Wisely, the PCs under Tim Hudak recognize that the HST and corporate tax reforms were indeed good for the province. As Opposition leader, Hudak is not recommending a reversal of policies (unlike his less-savvy counterpart in B.C.), although he is pushing for the elimination of the HST for home heating and electricity. Good politics, however, does not always make good policy. Seeing the public’s anger over escalating home energy prices, it is easy to be seduced by the notion it is right to remove the HST on these products.

However, this policy makes little sense. It provides an unfair tax break for energy-inefficient users and distorts consumer decision-making toward more energy, which is already heavily subsidized in retail markets. It would have been far better for the PCs to recommend a reduction of the HST to 7.5 points from eight points when it is fiscally affordable. It would have been consistent for a party that is looking to reduce the government’s role in people’s everyday life, including less intervention in energy markets.

Most dangerous are the NDP tax reform policies that could put the province back onto a very slow growth trajectory. The NDP would increase the corporate income tax rate from 10% to 14% for non-manufacturing profits, which not only will hurt job creation but also bring back needless complexity. Sure, it proposes some investment tax credits to encourage job creation, but these policies have been shown to fail over time, since governments pick poorly with selective policies based on political, not economic considerations. The province won’t even get much revenue from corporate tax rate increases since large- and medium-sized corporations will shift profits out of Ontario to other provinces or the rest of the world.

The NDP would keep the HST, but wishes to make permanent the restrictions on input tax credits that increase the cost of telecommunications, automobiles, repair and some other selected costs. Keeping taxes on business inputs after 2015 won’t exactly make Ontario more competitive in international markets. As recent studies have shown, business input taxes ultimately hurt most those workers with lower incomes and less productivity.

Like the PCs, the NDP proposes the anti-green policy of taking the HST off home heating and electricity and other necessities, or to get rid of the HST altogether. Along with the permanent restricted input tax credits, the NDP would break the contract with the federal government. This would be a promise it would regret, since it would mean two separate sales taxes operating in Ontario. Perhaps it knows it won’t win the election, but voters know, from ex-premier Bob Rae’s time, that anything can happen.

This Ontario election is not about smart new tax-policy initiatives, but it is about finishing some good ones in place. Perhaps this is not unexpected, since the province faces an uncertain world with a large budget deficit. During an election campaign, it is hard to articulate smart tax reforms that create jobs without costing a bundle of money.

Financial Post
Jack M. Mintz is the Palmer chair in public policy, School of Public Policy, University of Calgary.

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