HST will help, not hinder, Manitobans

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This article was published 22/12/2009 (3642 days ago), so information in it may no longer be current.

Finance Minister Rosann Wowchuk last week kiboshed a harmonized sales tax (HST) for Manitoba. Her reasoning: "We don't think it makes sense to impose $405 million in new sales taxes." While such rhetoric might be good politics, it is terrible economics and worse, actually misrepresents the facts.

The reality is that introducing an HST in Manitoba would have little or no effect on the total sales taxes paid by Manitobans. It would, however, make Manitoba a more attractive province for business investment.

If Wowchuk and her colleagues are truly interested in improving Manitoba's economy, they would reconsider their decision on the HST.

Let's first dispel the notion that the HST would impose $405 million in new sales taxes on families.

Currently, Manitoba maintains its own seven per cent provincial sales tax (PST). One of the key problems with the PST is that it applies to both business inputs and the final consumption of goods and services.

That means businesses are charged the PST on the inputs used in producing goods and services with increased costs passed on to consumers in the form of higher prices (imbedded sales taxes). The consumers are then charged the PST on the final products and services they buy. The end result is that Manitobans pay significantly more PST than the seven per cent they are charged at the till.

An HST would replace Manitoba's provincial sales tax with a single harmonized sales tax of 12 per cent — a combination of the seven per cent PST and five per cent federal GST. The HST would be a "value-added" tax that would only apply to final goods and services — businesses would be refunded the sales tax they pay on inputs.

Past experience with sales tax harmonization in Canada provides evidence that the savings for businesses that no longer pay sales tax on inputs would be passed on to consumers in the form of lower prices.

In 1997, three Atlantic provinces (Newfoundland and Labrador, New Brunswick, and Nova Scotia) harmonized their previously independent provincial sales taxes with the federal GST. Prof. Michael Smart of the University of Toronto examined the effects of the harmonizations and found that consumer prices in the harmonizing provinces fell after the 1997 reforms. How would the province recoup the lost revenue from refunding the sales taxes on business inputs, which would amount to $510 million a year, and keep the provincial portion of the HST at seven per cent? The group of goods and services (tax base) upon which the HST would be applied would be greater than the current provincial sales tax.

Expanding the tax base to include goods and services (gasoline, books, hair cuts, manicures and pedicures, new homes) that are currently exempt from sales tax would bring in an additional $405 million to provincial government coffers.

Wowchuk wants Manitobans to believe the $405 million is the extra amount that Manitobans will pay in "new sales taxes." However, she does not include savings that consumers will receive from lower prices. While more goods and services would be taxed after harmonization, the embedded sales tax (from taxing business inputs) would be removed.

Even more importantly, Wowchuk does not factor in the damaging impact the PST has on Manitoba workers. Since the current provincial sales tax is applied to business inputs, it increases the cost of investing in machinery, equipment and new technology.

This means Manitoban businesses invest less in the machinery, equipment and new technologies that make workers more productive. Higher worker productivity is what drives wages. A lower level of investment in productivity-enhancing machinery and equipment ultimately means lower wages for workers.

Under an HST, businesses could claim a refund on the sales tax they pay on business inputs, reducing the tax penalty on new business investment and improving the incentives for investment.

Again, experience from Atlantic provinces shows that after the 1997 reforms, per capita investment rose by more than 11 per cent in the harmonized provinces compared to the non-harmonized provinces.

Manitobans would do well to ignore the rhetoric from Wowchuk and consider the real facts. With an HST, Manitoba would improve its investment climate and increase the competitiveness of Manitoba businesses, with little or no effect on the total sales taxes paid by Manitobans. Simply put, the HST is an excellent economic deal which would provide significant and lasting economic benefits to the province.

Niels Veldhuis is an economist at the Fraser Institute www.fraserinstitute.org