So a lot of people out there are telling you that the Ontario and BC governments are raising your taxes. How you ask? The HST they tell you. Your (un)friendly neighbourhood curmudgeon is here to tell you otherwise. The HST will save businesses money. The HST will increase investment in Ontario and BC. The HST should drive consumer prices down overall.
First, a bit of a history lesson. The Ontario and BC governments announced plans to harmonize their provincial sales taxes with the federal goods and services tax to create a combined tax; the harmonized sales tax (HST). Everyone panicked and got all up in arms thinking the price of goods and services in Ontario and BC will go up. These people are ignoring the fact that harmonization already happened in New Brunswick, Nova Scotia, Newfoundland and Labrador, and Quebec. And the overall consumer prices in those provinces are no worse off than they were before. A study by Michael Smart for the CD Howe Institute suggests otherwise; consumer prices fell. But most people west of Quebec fail to recognize there is anything east of Ottawa and began to create anxiety with wild stories of tax hikes and Armageddon.
First, a bit of a history lesson. The Ontario and BC governments announced plans to harmonize their provincial sales taxes with the federal goods and services tax to create a combined tax; the harmonized sales tax (HST). Everyone panicked and got all up in arms thinking the price of goods and services in Ontario and BC will go up. These people are ignoring the fact that harmonization already happened in New Brunswick, Nova Scotia, Newfoundland and Labrador, and Quebec. And the overall consumer prices in those provinces are no worse off than they were before. A study by Michael Smart for the CD Howe Institute suggests otherwise; consumer prices fell. But most people west of Quebec fail to recognize there is anything east of Ottawa and began to create anxiety with wild stories of tax hikes and Armageddon.
The truth is the HST is going to be good for all of you. First, the cost of doing business in Ontario and British Columbia is going way down. Business owners currently pay 8% PST in Ontario and 7% PST in BC on items consumed in operating their business; generally anything that is not directly resold or further processed or manufactured. That 8% and 7% is not currently recoverable. Post harmonization, the PST going away and is being replaced, for the most part, by the fully recoverable HST. Most businesses will pay a combined 13% or 12% and will be entitled to an equal and offsetting credit. That means there will no longer be any unrecoverable sales taxes payable by businesses. So, businesses save money.
The tax savings realized by business will lead to more investment. With more money in hand, businesses will be able to invest more in new technology and new people. We will all benefit. It's the trickle down effect, the money businesses save and invest lead to more money for other businesses and that trickles down to me and you (hopefully more to me).
It is true that consumers will initially pay more direct sales tax than we currently do as things like houses and services are subject to tax at 13% in Ontario or 12% in BC rather than the current 5% GST rate. However, those houses and services have an indirect tax component (the 8% PST in Ontario and the 7% in BC) that we currently don't see, so the true tax increase is probably more like 2% (based on a study performed a long time ago in NFLD that I cannot share with you). That indirect tax is removed and, provided vendors pass those savings along, the true impact won't be that bad.
Now there are problems, of course, like charities, colleges, universities, hospitals, etc. will pay more taxes and they generally don't recover the HST they pay in the same way as ordinary businesses. I've studied the impact on a few of these organizations and found that, due to a gracious HST rebate mechanism, they will in fact be better off. This may not be true for all, granted, but I assume that the Province will provide additional funding for those organizations that it is required to fund.
I haven't gone into hardly any detail here (BTW, this is my area of expertise), but I hope to make two points to all of you. 1) it's all going to be OK, in fact, it will probably be better after the first few years; and 2) if you run a business, pass those Ontario PST savings along. This is crucial to all of us.
One final point on whether or not the HST is a tax hike. Ontario and BC are losing their PSTs; the HST is a federal tax. While there is a complicated formula that creates a transfer payment from Canada to Ontario and BC, the truth is, harmonization will result in Ontario and BC collecting less tax, even with the transfer payment. This is not a tax hike folks, it is a reduction in overall taxes collected. Look it up, it's in the Ontario budget papers. The reason to harmonize it is to increase investment in the provinces and make the provinces more competitive in the global marketplace.
Now, sit back and relax. It's going to be OK. The world didn't end in the Atlantic Provinces and Quebec and it's not going to end in Ontario and BC.
The tax savings realized by business will lead to more investment. With more money in hand, businesses will be able to invest more in new technology and new people. We will all benefit. It's the trickle down effect, the money businesses save and invest lead to more money for other businesses and that trickles down to me and you (hopefully more to me).
It is true that consumers will initially pay more direct sales tax than we currently do as things like houses and services are subject to tax at 13% in Ontario or 12% in BC rather than the current 5% GST rate. However, those houses and services have an indirect tax component (the 8% PST in Ontario and the 7% in BC) that we currently don't see, so the true tax increase is probably more like 2% (based on a study performed a long time ago in NFLD that I cannot share with you). That indirect tax is removed and, provided vendors pass those savings along, the true impact won't be that bad.
Now there are problems, of course, like charities, colleges, universities, hospitals, etc. will pay more taxes and they generally don't recover the HST they pay in the same way as ordinary businesses. I've studied the impact on a few of these organizations and found that, due to a gracious HST rebate mechanism, they will in fact be better off. This may not be true for all, granted, but I assume that the Province will provide additional funding for those organizations that it is required to fund.
I haven't gone into hardly any detail here (BTW, this is my area of expertise), but I hope to make two points to all of you. 1) it's all going to be OK, in fact, it will probably be better after the first few years; and 2) if you run a business, pass those Ontario PST savings along. This is crucial to all of us.
One final point on whether or not the HST is a tax hike. Ontario and BC are losing their PSTs; the HST is a federal tax. While there is a complicated formula that creates a transfer payment from Canada to Ontario and BC, the truth is, harmonization will result in Ontario and BC collecting less tax, even with the transfer payment. This is not a tax hike folks, it is a reduction in overall taxes collected. Look it up, it's in the Ontario budget papers. The reason to harmonize it is to increase investment in the provinces and make the provinces more competitive in the global marketplace.
Now, sit back and relax. It's going to be OK. The world didn't end in the Atlantic Provinces and Quebec and it's not going to end in Ontario and BC.
4 comments:
Good blogging Donnie, this is a good read. This would be pretty interesting research work, you seem to be good at what you do.
-- Siobhan
Thanks Siobhan,
I wrote it quickly and used words I otherwise would refrain from using if it were a proper technical analysis or research project.
I believe I aced Professor Boothman's Business Studies class, so you shouldn't be surprised (pats self on back).
I have to agree that this is for the greater good. However, I don't think that it ends up being better for the consumer at the til.
There are certain political freedoms that the province loses when they give in to the tax. For example, certain purchase incentives no longer exist. A specific example is safety gear. BC used to not charge provincial tax on things that fell into that category.
When I was living in PEI, I actually found it refreshing to come back to the "two-tax" system when I sometimes wouldn't be charged both taxes. Overall, like you said it is about the business community, and the betterment of society, not joe public at the 'til.
Good post Don.
Thanks Dr. DJ double A.
But I want to reiterate that while you may not have paid 2 taxes directly on certain items, you were paying the direct GST and an amount of hidden indirect PST that formed part of the cost of the single tax items. That's a benefit of the HST, the tax is no longer hidden. You will pay more tax directly on certain items, but it "should" (if savings are passed on) lower the overall cost of goods and services.
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