Ontario urged to harmonize sales tax.

OTTAWA – Harmonizing Ontario’s provincial sales tax with the GST would give the struggling province a much-needed shot in the arm and better position it to attract investment once the financial crisis subsides, says a report from the C.D. Howe Institute.

The Toronto-based think-tank released its analysis Friday, just under a week before the Ontario government unveils its latest budget in the midst of one of the worst economic slumps the province has found itself in.

"Ontario’s economic outlook would much improve if the province now joined in, by eliminating the province’s destructive sales tax," said Finn Poschmann, the think-tank’s vice-president of research and report author.

Adopting a harmonized sales tax would, in the C.D. Howe’s estimation, "dramatically" lower the amount of tax Ontario’s businesses pay on investments, and take the province from being an "extraordinarily" high-tax jurisdiction for business to a "medium-tax" jurisdiction.

At present, the province’s effective tax rate on investment – which encompasses all levies from all levels of government – stands at roughly 35 per cent. Should Ontario opt to harmonize, that rate could drop to nearly 22 per cent by 2012.

Three Atlantic provinces and Quebec have a harmonized sales tax whereby the tax base is the same as the GST, and the collection of the federal and provincial taxes is unified. Ontario is one of five provinces that maintain a separate provincial sales tax, which is collected separately from the GST and applied to a different set of goods and services.

Nearly half of the revenue generated from Ontario’s sales tax is generated through business investments which are not subject to GST.

The biggest benefit from a harmonized sales tax is increased business investment. Ontario has among the highest taxes on capital investment in the industrialized world, in part because it levies a sales tax on such business inputs as machinery and the equipment companies need to increase their output.

Poschmann and other economists have urged Ontario to undertake such a reform, but the provincial government had steadfastly refused – up until now. In January, Ontario Premier Dalton McGuinty said he was willing to take a "long, hard look" at a harmonized sales tax, and such an initiative could be contained in next week’s provincial budget.

There could be opposition to the move because it does shift the tax burden from businesses to households. However, Poschmann said evidence from the Atlantic provinces suggests businesses do indeed pass on the savings to consumers. "Overall consumer prices fell by an amount roughly commensurate with the overall tax-rate decline," Poschmann said.

Canwest News Service