HST -- short on facts, long on friction

We agree that public hearings are a good idea, although we would caution Angus that if the public gets the facts, the outcome is likely to be contrary to the one he is looking for. The supposed benefits of sales-tax harmonization may not survive public scrutiny.

Whereas it is difficult to determine the net effect on ordinary people, there is little debate about the effect on business: it wins in spades. Advocates of harmonization, such as the British Columbia government -- which just closed a deal with Ottawa to switch to a HST -- claim that the savings businesses realize will be passed on to consumers in the form of lower prices, but that claim deserves closer scrutiny. The Winnipeg Free Press reports that Nova Scotians paid $84 million more in tax the first year harmonization was implemented, and the Ontario Chamber of Commerce estimates that consumers will pay $905 million more under the new HST. Will prices be reduced accordingly?

In B.C. we know that essential items such as children's clothing, car seats, booster seats and diapers will be subject to the new HST whereas they were not subject to provincial sales tax, thereby increasing their cost seven per cent. The B.C. government supposedly dealt with this by offering point-of-sale rebates, but there is a long list of items that will not receive these rebates. The list includes: safety helmets, life jackets, first-aid kits, smoke detectors, energy-conservation equipment, funeral services, non-prescription medication, vitamins, bicycles, school supplies (books are exempt) and home care.

The B.C. government had exempted these items to encourage their purchase in order to foster a safer, greener and more equitable society. Now with an HST, B.C. no longer can unilaterally decide to exempt from tax products it feels perform a valuable social function, nor increase tax on products deemed detrimental; it is at the mercy of the policy decisions of the federal government.

Why would a Conservative government, determined to decentralize Canada, promote a blended tax that would upload regional responsibility to Ottawa? The answer surely lies in its even stronger desire to help Canadian business.

While strengthening business in itself may be worthwhile, doing so at the expense of consumers and marginalized Canadians should never be a policy goal. What then should we make of federal Finance Minister Jim Flaherty's claim that decreasing red tape, taxes and expenses for companies will allow them to invest more and grow the Canadian economy, thereby creating more jobs?

Writing before B.C. and Ontario harmonized their sales tax, policy analyst Erin Weir wondered if removing billions of dollars from business tax inputs was the best way to stimulate investment. He noted that PST exemptions already apply to the most common form of capital investment, machinery and equipment, and that the federal finance department estimated that these exemptions lowered Canada's marginal effective tax rate by 6.5 per cent. Comparing that percentage to the U.S., Weir found that state sales taxes on capital investment had fewer exceptions, making their marginal effective tax rate higher than provincial rates; we already are competitive.

Weir estimates that only one quarter of the gains to business through harmonization would encourage investment. He cites accelerated depreciation and/or investment tax credits as being more effective at stimulating investment.

Angus notes that Manitoba's marginal effective tax rate will soon be the highest in Canada, making us less competitive with other provinces. The question of tax competitiveness is a contentious one. It pits province against province as places like Alberta, often awash in oil royalties, can start a tax-rate race to the bottom. The most frustrating part of the whole low-tax competition argument is that there is little empirical evidence to back two of the most commonly held assertions: firstly, that high-tax jurisdictions are less competitive; and secondly, that businesses rank low taxes high on their list of requirements. Highly taxed Scandinavian countries have some of the most productive economies. Research shows that businesses are more concerned with having access to an educated, healthy workforce, efficient public infrastructure and reasonable energy costs than low taxes.

One could make an argument for making consumers bear the brunt of harmonization were there a proven net gain through job creation and improvements in environmental, health and safety policy. The B.C. experience shows us that provincial policy can be hijacked by less progressive federal policy. Weir's research at least questions the assumption that savings to businesses will result in meaningful investment or reduced prices. Other research indicates that adopting the HST would not enhance Manitoba's competitiveness.

Manitoba should not implement regressive policies such as the HST. It should compete on the basis of wise public investment in education, health care, infrastructure and efficient sources of energy.

Lynne Fernandez is a political economist with the Canadian Centre for Policy Alternatives MB.

Republished from the Winnipeg Free Press print edition November 19, 2009 A14