June 5 - How to improve harmonized tax

June 5, 2009

As seen in the Toronto Star June 4, 2009


How to improve harmonized tax 

Instead of launching an ad campaign promoting a harmonized sales tax, the Liberal government at Queen's Park ought to be fixing it.

It is a good idea to combine the 5 per cent federal GST and the 8 per cent provincial sales tax into one 13 per cent "value-added" tax. The move will reduce paper work for business and give a big boost to new investment, which the existing provincial sales tax discourages.

To offset the cost to consumers from the shift of the provincial tax to items now subject only to the GST - from hair cuts to fast food - the government is planning a one-time payment of $1,000 plus a permanent $2 billion cut in income taxes.
Even the opposition Conservatives, who are conducting a cynical campaign against harmonization, acknowledge privately it is an overdue move and they would not reverse it if they won the next election.

But the measure was rushed, with only a couple of months between Premier Dalton McGuinty's about-face suggestion that he was open to the idea (which reportedly caught his own finance minister by surprise) and its unveiling in the March budget. And in its haste, the government apparently overlooked some of the potentially negative consequences, notably for new homes, which are not subject to the existing provincial sales tax.

An additional 8 per cent tax on a hair cut is a relatively small burden for consumers to bear. But on a $400,000 condo, it can be a deal-breaker. Given that the housing industry is already suffering from the global economic downturn, the timing could not have been worse.

The government tried to anticipate this by reducing the provincial share of the harmonized tax on new homes below $400,000 to just 2 per cent (effectively, the amount of the embedded provincial tax on new housing sold today). The tax will increase gradually for homes priced between $400,000 and $500,000, with 8 per cent applied to the full price of anything above that level. So the buyer of a $400,000 home would pay just $8,000 in tax whereas the buyer of a $500,000 home would pay $40,000. This makes no sense.

As well, the full 8 per cent tax will apply to condos bought for rental purposes - more than half of the current market.
The home builders are calling for the tax to apply just to the portion of the price in excess of $400,000 and for rental housing units to be treated the same as owner-occupied. As well, the builders want housing units started between now and the implementation date of the harmonized tax (July 1, 2010) to be grandfathered and exempted.

These are reasonable demands that would not cost the treasury an exorbitant amount (up to $250 million, or less than one-quarter of 1 per cent of government revenues). They should be met.