For Provinces that have yet to harmonize the GST with their provincial sales taxes, timing is the enemy. Although there are many benefits, they would come to fruition only in the future, while the political backlash would be immediate.

In the longer run, British Co-lumbia, Saskatchewan, Manitoba, Ontario and Prince Edward Island would see higher productivity, stronger economic growth and more jobs if they harmonized their provincial sales taxes with the GST. However, such a move would make voters unhappy.

One way out of such a dilemma would be the gradual implementation of a province-specific, value-added tax that fits with that province’s economic and social priorities. It’s a method that worked in Quebec, says Jack Mintz, professor of business economics at the University of Toronto’s Rotman School of Management.

Another option: Ottawa could offer a financial incentive to harmonize — as it did with New Brunswick, Nova Scotia and Newfoundland. In those cases, Ottawa provided funding that allowed for a harmonized rate lower than the combined GST and provincial sales taxes. But this could prove to be expensive when it comes to provinces the size of B.C. and Ontario, given that businesses pay 33%-40% of provincial sales taxes, depending on the jurisdiction.

A third option is to wait until the federal Conservatives implement the second GST cut. That would allow the unharmonized provinces to use the tax room Ottawa has vacated to make the move to harmonization.

But that could be a long wait. There is no guarantee the second tax cut will ever come and, even if it does, the Conservatives promised the cut only within five years — by 2011. In the meantime, the unharmonized provinces and their companies will be losing business and competitiveness.

The economic benefits of a VAT system lie in the rebates for business inputs. The rebates allow companies to compete on a level playing field against imports from provinces and other countries that either use a VAT — as most other countries do — or don’t charge any sales taxes at all, such as Alberta.

The VAT also increases competitiveness against imports from countries such as the U.S., which still charges traditional sales taxes. This encourages local firms to expand and makes the provinces more attractive locations for companies from other jurisdictions, thereby increasing economic activity and generating more jobs.

A VAT also encourages investment in machinery and equipment that increase productivity because the sales taxes on these products — which can be quite significant, given their large costs — are rebated. Although provinces often exempt some machinery and equipment from sales taxes, it’s on a patchwork basis.

As a result, the urgency to move to a VAT is increasing every day, says Jack Miller, a senior partner at Miller Kreklewetz LLP, a Toronto law firm that specializes in commodity taxation.

“It’s getting harder and harder to persuade head offices to choose Ontario over non-provincial sales tax provinces and non-Canadian locations,” Miller says. “We are shooting ourselves in our collective foot because of taxes.”

The situations in B.C. and Saskatchewan are similar. Both provinces are next door to Alberta, which has no provincial sales taxes, and both are losing business to their neighbour. Firms are choosing to set up holding companies in Alberta, says Robin MacKnight, partner and tax lawyer with Wilson Vukelich LLP in Markham, Ont.: “You see the effect daily.”

Manitoba is also affected, but to a lesser extent.

The major stumbling block to implementing a VAT is that it’s next to impossible to convince consumers that they will not suffer under such a system. In the VAT, visible taxes increase. Whereas provincial sales taxes apply only to goods, VATs apply to services as well.

However, the fact is that companies now include the cost of any taxes they pay when they price their goods, so consumers are already paying the taxes charged to businesses without even realizing it.

One thing that could make a move to a VAT more palatable would be a promise to keep the corporate income tax rates at current levels rather than reducing them, Miller suggests. Consumers would like that and businesses shouldn’t complain because they would get greater benefits from moving to a VAT than they would receive from cuts to their corporate income tax rates.

@page_break@However, it’s the gradual implementation and the ability to tailor a VAT to provincial priorities that makes the Quebec solution so attractive. Quebec started with a VAT under which businesses still paid taxes on a variety of inputs and consumers paid lower taxes on services. This kept the VAT rate lower than full harmonization would have required. Over time, Quebec has moved closer and closer to the GST, including taxing services at the same rate as goods.

The Quebec sales tax is now 97%-98% of the GST.

The flexibility offered by the Quebec solution is also attractive. Provincial politicians don’t want to lose tools for implementing economic and social policies; and there are differences between provinces that would justify some variation in how a VAT is implemented.

Ontario, for example, would pro-bably want a higher minimum level at which consumers have to pay the VAT on a new home, given house prices in Toronto, Mintz says. The same thing applies to B.C. because Vancouver house prices are also very high.

Other examples could include children’s clothing and meals costing less than a certain amount. IE