Not a Tax Grab After All a Second Look at Ontario’S HST

> December 2009 Not a Tax Grab After All A second look at Ontario’s HST By Ernie Lightman and Andrew Mitchell About the authors Ernie Lightman received his BA in economics and political science from the University of Toronto and his MA and PhD in economics from the University of California at Berkeley. After graduation he taught for two years at the London School of Economics Please make a donation... Help us continue to offer and for the last 30 years has been a professor of our publications free online. social policy at the University of Toronto Faculty of Social Work. In 1991–92 he was a one person We make most of our publications available free commission of inquiry looking into unregulated on our website. Making a donation or taking out housing for vulnerable adults in Ontario. 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Printed copies may be ordered through the National Office for a $10 fee. 410-75 Albert Street, Ottawa, on k1p 5e7 tel 613-563-1341 fax 613-233-1458 email [email protected] www.policyalternatives.ca Not a Tax Grab After All: A second look at Ontario’s HST Introduction a sweeping set of personal income tax (PIT) reductions to further offset the new tax. There On March 26, 2009, Ontario Finance Minister was also transitional financial assistance, de- Dwight Duncan tabled the provincial budget, the signed to last three years, to buffer the move to centrepiece of which was a new ‘harmonized’ sales the new system. tax (HST). This decision meant that the separate Initial responses from many observers, in- provincial (8%) and federal (5%) sales taxes would cluding ourselves, were conditioned by the rela- be combined into a single tax (13%). Beginning tionship between sales taxes and people’s ability July 1, 2010, Ontario will follow the lead of three to pay as measured by income. Because lower- Atlantic provinces (excluding PEI) and, with income households spend a larger proportion of slight variation, Quebec. Soon after Duncan’s an- their income on taxable goods and services than nouncement, British Columbia announced that do higher-income households, sales taxes in gen- it, too, would be going down this path. eral are regressive. The effective rate of tax goes For most of the public, the big news event down as income increases. On its own, then, the was that the new harmonized tax would be HST transfers resources away from low-income largely built on the base of the federal GST. The households. And it does so at the worst possible new sales tax would be extended to many items time, on the tail end of a recession. such as services and home heating fuels that had The provincial government acknowledged been previously exempt under the old provincial that harmonization would produce an overall sales tax (PST), increasing the amount of sales gain in revenue raised disproportionately from tax consumers will pay. low-income households but asserted that the However, Duncan also announced that there enhanced tax credits and personal income tax would be new property and sales tax credits, cuts that rounded out the package more than analogous to the federal GST credit, intended to offset that increase for low- and middle-income offset the effects of the new levy for those with households and resulted in only relatively mod- middle and lower incomes. He also introduced est net increases for everyone else. not a Tax Grab After All 3 The purpose of this paper is to test the va- a $27 annual loss in income when averaged over lidity of the government’s claim that the cred- all families in Ontario. its and income tax changes offset the increase 8. Ontario families with the lowest incomes in revenue resulting from harmonization for ($10,000–$20,000) will be better off by around low- and middle-income households. This pa- $119 on average, while the richest families (with per measures the impact of the tax mix shift be- incomes above $100,000 per year) will be worse tween the personal income tax and the HST. It off by nearly $324 annually (approximately 0.2% does not address the issue of tax shifts between of family income). business and households in the change from the RST to a value added tax and assumes implicitly 9. Poor families, those with incomes below the that businesses will pass the bulk of these sav- Low Income Cut Off (after-tax), come out ahead ings on to consumers. by around $200, while non-poor families will lose This analysis finds: only about $60 per year on average. 1. Families in a wide range of incomes ($30,000– The paper steps through the analysis in three $90,000) should be better off on average by sections. In section 1, we summarize the tax less than $80 or worse off by less than $65 per changes announced by the government in the year — which, given our assumptions and the March 2009 Ontario Budget. In section 2, we limitations of the data, amounts to a wash.14 describe our methodology and assumptions. In section 3, we present the detailed results of our 2. Low income families and individuals, many analysis and our conclusions from that analysis. members of First Nations and others who do not tend to file tax returns will be significantly 1 worse off as they will derive no benefit from the The Tax Changes credits or the PIT cuts. HST 3. Estimated winners and losers are better or The centrepiece of the tax changes introduced worse off by only modest amounts of money. on March 26, 2009 was the new ‘harmonized’ sales tax or HST, to replace the existing provin- 4. The negative impact of the HST increases as cial sales tax (PST). The HST would be levied income rises. Rich people spend more money on the same base as the existing federal Goods than do the poor and, as a result, rich Ontarians and Services Tax (GST), meaning that certain will pay more sales tax. items, including all services, that had not previ- 5. The sales and property tax credits offset this ously been subject to the PST would now be li- to a limited extent up to family incomes in the able to the HST. With very few exceptions, this $70,000–$80,000 range. meant that everything currently subject to a 5% GST would, after July 1, 2010, be subject to a 13% 6. The combined effect of the sales and property HST.2 Clearly this would entail new tax liability tax credits, plus the reductions in personal in- for everyone spending money in Ontario. come tax rates across the board, substantially Equally — or perhaps, more — significant than offset the impact of theHST at all income levels. the changes in the tax base were the changes in 7. The net combined effect of all the changes — new tax philosophy and design. The oldPST is a stand- HST plus sales/property tax credits plus personal ard ad valorem sales tax where a purchaser pays income tax reductions — is very close to neutral, a fixed percentage on all purchases in designated categories. The tax applies at the point of sale for 4 canadian centre for policy alternatives final consumption, whether final consumption cent of rent paid. A credit will be provided for takes place at the retail level or at another level in occupancy cost of up to $250 for non-seniors or the production process. Each sale for final con- $625 for seniors, plus 10 per cent of occupancy sumption stands on its own for tax purposes. As cost. The credit will not exceed occupancy cost a consequence, retail sales tax can apply at sev- and would be subject to a maximum of $900 for eral different stages of the production process, non-seniors and $1,025 for seniors. as long as the product is transformed in some The credit will be adjusted by two per cent of way before moving on to the next stage. Certain family net income over $20,000 for single people categories of goods are exempt from tax at the and over $25,000 for families. It will be refund- retail level. Exemptions for businesses are lim- able and claimed on the personal income tax re- ited. Goods purchased for re-sale (i.e. sold with- turn, beginning with the 2010 return. out having been transformed) are exempt, as are certain categories of machinery and equipment Personal Income Tax Changes employed in the production process. The third element in the tax package is a set of In contrast, the HST, like the GST, is a value- changes to the personal income tax (PIT) system added tax where manufacturers receive a credit in Ontario.

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