Ontario could significantly improve its economic outlook by replacing the provincial retail sales tax with a harmonized sales tax, according to a new report by the C.D. Howe Institute.

The report, released on Friday, says that Ontario’s economic potential, including export sales, would improve permanently by half a percentage point — a tremendous boost in provincial income — if the province adopted the harmonized tax.

The effective tax rate on business capital investment would drop significantly to 21.8% following the reform, down from 31.9% absent reform, according to the report by author Finn Poschmann.

“The difference moves Ontario from being an extraordinarily high tax jurisdiction, within North America, to being a medium-tax jurisdiction,” he says. This would boost investment in construction, machinery and equipment, and would improve labour productivity and workers’ wages, Poschmann adds.

The report acknowledges a number of concerns with the harmonized sales tax, including its potentially harmful impacts on financial services and other sectors that produce outputs that are not taxed under the provincial retail sales tax but would be under a value-added GST.

“Reform could inflict sudden harm on these businesses,” the report says.

To mitigate such impacts on the financial services sector, the C.D. Howe Institute suggests that Ontario could tax financial services provided to households, and “zero-rate” business services, while allowing credits for all tax paid on inputs. Another option would be to follow Quebec’s approach, zero-rating sales of financial services while disallowing input credits for some business purchases.

According to the report, the current GST model for financial services — under which no tax is applied to sales and no refund is provided for taxes paid on inputs — is ineffective. It distorts the market by embedding tax in the cost of providing financial services, the report says.

Other concerns with the harmonized tax include broadening the sales tax base to cover items that are generally exempt from provincial sales tax, which could adversely affect low-income households’ ability to spend on these items. But the report says extending offsetting low-income credits could easily mitigate this problem.

“These concerns can be addressed through simple policy moves,” the report says.

Ultimately, workers, employers and consumers could all benefit from reform, according to Poschmann.

“The province sorely needs near-term and long-term boosts to its growth and investment outlook, which sales tax reform, with appropriate policy fine-tuning, can deliver.”

http://www.newswire.ca/en/releases/archive/March2009/20/c2843.html

IE