Will the new tax Become McGuinty’s Legacy?

Whether or not you agree with his policies, Ontario Premier Dalton McGuinty has never shied away from controversial decisions. The latest of several rather contentious policies his government has introduced in its six years in power is the Harmonized Sales Tax (HST). The name sounds nice – the word ‘harmonized’ evokes images of consumers, business owners and tax-gatherers living happily together to a peaceful choral soundtrack. However, the mere thought of another new tax, especially one that increases the price of some things, is enough to make a lot of people bristle.

It has been a little over 13 years since McGuinty became leader of the Ontario Liberal Party and almost six and a half years since he became the premier of Ontario. This period has been eventful to say the least. In the 2003 election, the incumbent Progressive Conservative Party was turfed out, partly due to what many voters considered to be an overly combative and confrontational governing style. McGuinty and the Liberals surged to power on the back of several campaign promises, including one not to raise taxes. Within his first year in office, McGuinty had already raised taxes, in the form of the controversial Health Premium.

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McGuinty overcame these set backs and has introduced a number of popular initiatives, such as investment in the automotive sector, promotion of innovation and energy and productive negotiations with unions. He was re-elected in 2007, and continues to enjoy strong support among some sectors.

Predictably, the threat of HST, which will take effect this July, has created a lot of fear, only some of which is founded. Many people feel that this is yet another tax on top of all the ones we currently pay. What many people don’t realize is that the HST actually replaces two existing taxes: the eight per cent Provincial Sales Tax (PST) and the five per cent Goods and Services Tax (GST). This means that we will actually have fewer taxes to think about. Moreover, the prices of many consumer items will not change at all when the HST takes effect on July 1.

The bad news for consumers is that the new tax doesn’t reduce either the GST or the PST,  it just combines them. And it applies to some items that were previously exempt from one or both of these taxes. These items include electricity and gas (so you will see higher utility bills than you are used to), tobacco, magazines, vitamins and even Christmas trees. It will also apply to taxi fares and professional services, which includes everything from hairdressers to accountants and lawyers. Some items will be exempt from the new tax, including newspapers and fast-food purchases of $4 or less.

Why do we need a new tax? What’s wrong with the way things are? Well, in what is widely recognized as one of the worst economic environments since the 1930s, the provincial government says that we need to create jobs, increase investment and boost exports. As Finance Minister Dwight Duncan said when he unveiled the new legislation, “Our province is in the middle of a global economic and financial storm.” The argument is that the new tax legislation, including the HST, will help achieve these goals. Furthermore, the new legislation means that we, as a province, are really just falling in line with most developed economies in the world in moving away from our old-fashioned ‘cascading’ tax system. As McGuinty himself says, “It’s also about catching up to 140 other countries. In all those other places, they have an efficient single sales tax system like the HST. That gives their businesses a real competitive advantage, which we absolutely must give to our businesses to help them succeed.”

But just because all the cool kids are doing it, does that mean that we have to? Just because it is fashionable, does that mean it is better?

While the average person on the street may or may not feel the direct benefits of HST, there are indirect benefits. Businesses and the province as a whole can expect significant advantages. For example, businesses will be able to claim tax credits for the cost of materials and other products – costs that they currently pass on to consumers. Business owners who now have to deal with their GST and their PST separately will also benefit from reduced paper work. According to the Ontario Chamber of Commerce, businesses could save up to $1.6 billion a year as a result of these changes. Furthermore, a harmonized sales tax will reduce the cost of Ontario’s exported goods, which will make the province more competitive.

“It’s also about catching up to 140 other countries. In all those other places, they have an efficient single sales tax system like the HST. That gives their businesses a real competitive advantage, which we absolutely must give to our businesses to help them succeed.”

In an effort to offset some of the additional consumer costs, the province has initiated some tax relief measures. These include property tax credits, cuts to personal income taxes for 93 per cent of Ontario’s taxpayers and a reduction in the corporate tax rate. If your family makes less than $160,000 a year, the government will send you a cash payment of $1,000; if you are single and earn less than $80,000, you will get $300.

“Some people believe the price of everything will go up because of the HST,” says McGuinty. “In fact, only about 17 per cent of total consumer expenditures will see an increase in sales tax. And our intention is to offset this increase through your personal income tax cut and our transition payments.” While these cuts, credits and cheques are certainly nice for some people, the problem is that the HST could cause consumers to end up paying $900 million more each year, again according to the Ontario Chamber of Commerce. This will undoubtedly hurt the pocketbooks of Ontarians who have already felt a variety of pinches, from gasoline to house prices, over recent years. Opinions remain divided on whether the new tax legislation will be a help or a hindrance. Many economists and other financial types are behind the move. Based on research by eminent economists, McGuinty argues that “our tax reforms will create 591,000 new jobs over 10 years.” In addition, salaries could rise by nearly nine per cent over that same period, compared to what they would have otherwise. Several influential associations, including the Retail Council of Canada and the Certified General Accounts of Ontario, have also endorsed the McGuinty government’s optimistic opinion.

The new legislation also appears to have broad political support. “It’s interesting to note how support for the HST goes beyond our political stripes,” says McGuinty. “It’s already in place in provinces with Liberal, NDP and Conservative governments. And we could not have moved forward with the HST in Ontario without the support of the Federal Conservative government. It’s also worth noting that Ontario’s opposition parties will not commit to repealing the HST.” The average Joe on the street is not so convinced. An Ipsos Reid poll from late November 2009 showed that only 12 per cent of Ontarians were in favour of the new tax. Interestingly, however, once the 88 per cent of non-favourable respondents were informed about the benefits of the tax, such as the associated cuts in income tax and the fact that certain low-cost items would be exempt, around one-third of them changed their minds. A further 12 per cent followed suit once they were told that several other provinces had also adopted a similar tax. Nonetheless, as many as 72 per cent of people felt that the main beneficiary of HST would be the provincial government and nine out of 10 felt that consumers would not get anything out of it.

These seem like quite overwhelming numbers. Premier McGuinty admits that the HST is “not popular,” but he also feels that this will change. “I believe Ontarians will, over the course of time, come to better understand why we are doing this and what, exactly, it is we are doing,” says McGuinty. “For example, many Ontarians still do not know that our tax reform includes a tax cut for them. Nor do they know that the HST actually costs our government money.”

Perhaps we are just afraid of change. As McGuinty points out, “no place that has switched to a single sales tax like the HST has ever reversed it. Because it works. It creates jobs.”

Whatever transpires in July, the new Harmonized Sales Tax certainly marks a new era in Ontario’s economy. Whether it does indeed revive the province’s flagging economy and help create the ‘harmony’ that its name suggests, or whether it simply increases consumer hardship, history may well record it as the lasting legacy of Dalton McGuinty and his government. www.premier.gov.on.ca