Why Ottawa and Queen’s Park embraced the HST

Posted on June 30, 2010 in Governance Debates

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TheStar.com – Ontario/HST
Published On Wed Jun 30 2010.  Robert Benzie Queen’s Park Bureau Chief

Jim Flaherty nearly fell off his chair when the familiar voice on the other end of the phone asked if Ottawa was still eager to blend the GST with Ontario’s provincial sales tax.

It was February 2009 and entrenched opposition to harmonization at Queen’s Park had dashed the federal finance minister’s dream of one sales tax, which economists argue would boost competitiveness and spur investment.

On the line was Ontario Finance Minister Dwight Duncan with a stunning proposition.

“I had put my hand over the receiver as Dwight was talking, I was so gobsmacked,” the federal treasurer would later tell friends.

Less than a year earlier, Flaherty, himself a former Ontario finance minister, had complained the province was “the last place” in Canada businesses would want to invest in due to higher-than-average corporate taxes and other obstacles.

On the eve of Duncan’s 2008 budget, the feisty Conservative summoned reporters to his Toronto office and launched an extraordinary broadside against Premier Dalton McGuinty’s Liberal government.

“It’s time for Ontario to step up in support of our businesses,” he had thundered, imploring Canada’s largest province to slash corporate taxes, eliminate the capital tax, and, yes, harmonize the 8 per cent provincial sales tax with the 5 per cent federal goods and services tax.

Eleven months and one global financial meltdown later, Duncan was calling with an urgent message from McGuinty: Let’s work together to immediately revamp Ontario’s archaic tax system.

“I almost fell off my chair,” a delighted Flaherty would admit privately. The shocking policy shift, the federal treasurer would confide, was because “Bay St. had gotten to McGuinty and convinced him.”

Indeed, a 25-page report, “Time For A Vision Of Ontario’s Economy,” by then TD Bank chief economist Don Drummond was critical to McGuinty’s change of heart.

Released on Sept. 29, 2008, the sobering study took a longer term view of Ontario’s economic prospects beyond the usual cyclical ups and downs and concluded trends were heading in a scary direction.

It predicted an end to the days of relying upon an undervalued Canadian dollar, low-cost energy and free access to the U.S. to keep Ontario manufacturers competitive enough to propel the economy. Without radical restructuring, the province risked being left behind by emerging Asian powerhouses and by 2020 could be in serious trouble.

Like Flaherty, Drummond urged the government to institute a tax system that doesn’t penalize business or undermine productivity of Ontario workers — a regime that could aggressively compete with other provinces and countries.

“A retail sales tax, where almost half of the revenues come from capital and other business inputs, has no place in a modern economy. This major impediment could be addressed by replacing the PST with a harmonized GST,” the report said.

In other words, the existing PST companies pay on their equipment and supplies needlessly increases the cost of doing business in Ontario, which in turn leads to higher prices and discourages new firms from coming here.

As things stand until Thursday, consumers often pay sales tax on items and services that have already been taxed several times before they are even purchased and the misnamed “retail sales tax,” as the PST is formally known, is paid one final time.

Inspired by the report, McGuinty held a series of private dinners with academics and business leaders, including Drummond and TD Bank chair Ed Clark, sounding them out on the wisdom of transferring the consumption tax burden from Bay St. to Main St.

“The only thing that I can recall is at one particular point in time coming to my staff and saying: ‘We’re going to have to do this,’ ” McGuinty remembers.

Against the backdrop of a worldwide financial catastrophe and with Ontario’s manufacturing-dependent economy lassoed to the sputtering U.S., swift action was needed.

“When you lose 250,000 jobs in short order, you sober up very quickly and your choices become much more stark and you recognize that you’re going to have to make some difficult decisions in order to strengthen this economy,” the Premier says.

“There was a . . . continuing and growing awareness that what had been an option for previous governments was now going to be absolutely essential for us. It’s not something that we set out to do — it’s something, like most governments, we’d hoped to be able to avoid,” he admits, referring to the electoral risks.

“But then when our economy suffered a body blow from the recession . . . when we knew for certain it was not business as usual for Ontario any more, then I knew that the HST was no longer an option, but essential.”

Negotiations moved rapidly following Duncan’s initial contact with Flaherty. A private weekend meeting in Ottawa between McGuinty and Prime Minister Stephen Harper sealed the deal.

“We had a very supportive and cooperative federal government,” says the Premier, marvelling at the way his Liberals worked so well with Harper’s Conservatives.

“Economic circumstances make for strange bedfellows and we both knew that these were tough times, we both recognized that Ontario is Canada’s most powerful economic engine and we both knew we were going to have to do something to kick-start this economic engine.”

After initially offering the province $3.2 billion, the federal Conservatives would hand over $4.3 billion to be used for “transition” payments of up to $1,000 for every household with an income of less than $160,000.

That money, which began being distributed earlier this month, was to offset the higher levies on gasoline, home heating fuels, electricity, haircuts, taxi fares, legal fees and a slew of other goods and services.

But Queen’s Park won key concessions in the form of “point-of-sale rebates,” so only the 5 per cent federal GST portion of the 13 per cent HST will be charged on feminine hygiene products, books, diapers, children’s clothing and car seats, newspapers, and fast-food value meals and coffee under $4.

In turn, Ontario would do what both Flaherty and Drummond had been advocating.

Along with the HST, the general corporate income-tax rate will, as of Thursday, begin falling to 10 per cent from 14 per cent over the next three years with the manufacturers’ rate dropping to 10 per cent from 12 per cent.

Corporate taxes on small business are being cut to 4.5 per cent from 5.5 per cent and the small-business deduction surtax is being eliminated and business capital taxes, which had been scrapped for manufacturers and mining companies in 2007, will be gone as of Thursday.

Because of the secrecy involved in the negotiations, only a handful of politicians, aides and senior finance bureaucrats were aware that harmonization was imminent.

On March 10, 2009, McGuinty assured MPPs at the weekly government caucus meeting no decision had been made on blending the taxes. Yet 24 hours earlier, Flaherty and Duncan had signed the secret four-page memorandum of understanding with Ottawa promising the $4.3 billion in federal funding in exchange for harmonization.

Even other cabinet ministers were kept in the dark.

In a March 11, 2009 meeting of the executive council, McGuinty told ministers: “We’re thinking about doing this, what do you think?”

“(The Premier) made a big show of seeking our opinion,” remembers one cabinet member, noting ministers were generally supportive of harmonization but demanded a strong communications plan replete with endorsements from third-party business groups, unions, and academics.

“Good policy doesn’t necessarily make for good politics — Brian Mulroney can attest to that,” adds the Liberal, referring to the former Progressive Conservative prime minister’s problems selling the GST after it took effect in 1991.

Once Duncan formally unveiled the tax reform package in the March 26, 2009 budget, the Liberals began to fully appreciate how difficult it would be to sell voters on the complicated changes.

Both the opposition Progressive Conservatives and New Democrats immediately denounced the shift of the tax burden onto families and pledged to fight the HST — though, tellingly, neither Tory Leader Tim Hudak nor NDP Leader Andrea Horwath has ever promised to repeal it if elected premier next year.

(Interestingly, Flaherty’s wife and Whitby-Oshawa seatmate, Tory MPP Christine Elliott, has been one of the more vocal opponents of melding the taxes.)

The sophisticated marketing blitz that ministers and MPPs sought to help them convince their constituents also didn’t pan out.

Thanks to McGuinty’s own 2004 Government Advertising Act, all provincial newspaper, TV and radio advertising must be vetted by Auditor General Jim McCarter to ensure it is not politically partisan.

With only online ads exempt from the sweeping legislation, the government had precious few weapons in its arsenal.

McCarter last year refused to allow several print ads that promoted harmonization and the income-tax cut, calling the spots “misleading” and “problematic.”

Instead, a sanitized, auditor-general-approved campaign informed Ontarians of the tax plan without explaining the rationale behind it. That forced the Liberals to buy television time and pamphlets using party funds to promote the HST.

Nor were there enough credible, independent studies endorsing the tax for the liking of skittish Liberal MPPs. It took until November for the most important of these to be released when the University of Calgary’s Jack Mintz concluded the reduction in capital costs to business will help create 591,000 new jobs over the next decade — 103,000 in manufacturing alone.

Hamstrung by the ad ban and an initial dearth of outside advocates, McGuinty conscripted Revenue Minister John Wilkinson to sell the tax. Wilkinson criss-crossed Ontario, giving more than 100 speeches and news conferences, and unlike in turbulent British Columbia, where the HST will also be in effect starting Thursday, he faced little in the way of protests or public anger.

McGuinty, wrapping himself in Ontario’s red ensign, believes he knows the main reason why.

“As a population, Ontarians understand that things have changed on us very dramatically and we need to do something to grow stronger and not all of those things are easy. And this is one of them.”


How the tax affects us

The 8 per cent provincial sales tax and the 5 per cent federal goods and services tax are being melded into one 13 per cent harmonized sales tax as of Thursday.

While things like groceries will remain untaxed, levies will increase on one in six products and services that Ontarians purchase.

That’s because on nearly everything upon which you previously paid the 5 per cent GST, you will now pay the 13 per cent HST.

The only exceptions are:

books; newspapers; feminine hygiene products; diapers; children’s clothing; kids’ car seats; coffee and fast-food value meals under $4. These will continue to be taxed the 5 per cent federal portion of the HST.

Taxes will increase to 13 per cent on:

gasoline; electricity; heating fuel; home Internet service; dry cleaning; landscaping; housecleaning; home renovations; haircuts; aesthetician services, such as manicures; taxi fares; hotels; campsites; domestic air travel; magazine subscriptions; real-estate commissions; vitamins; massage therapy and funerals.

Taxes will also rise on: fitness trainer fees and gym memberships; golf green fees; hockey, soccer, karate, ballet and most other recreational fees (but not music lessons, which remain free of federal or provincial tax); ice rentals; hunting and fishing licences; tickets to live theatre; lawyers’ fees; private sales of used cars and tobacco and nicotine replacement products.

Taxes will decrease to 13 per cent from the current 15 per cent on tickets to movies and professional sporting events.

< http://www.thestar.com/news/ontario/hst/article/830336–why-ottawa-and-queen-s-park-embraced-the-hst >

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