CTV News Ottawa

Updated: Thu Dec. 03 2009 1:09:47 PM

ctvtoronto.ca

A leading economist says the harmonized sales tax is one of the most important things Ontario can do to help make its economy more competitive.

"The critics are missing the broader context. We're going to get a competitive pressure on Ontario the likes of which I think has never been seen before," Don Drummond, the TD Bank's chief economist, told ctvtoronto.ca on Tuesday.

"I think as a government, you've got to do everything possible to put it in the most competitive condition. And I don't think you can possibly say you've checked all the boxes if you leave in the Retail Sales Tax."

The eight per cent tax is called a Retail Sales Tax, "but 40 per cent of it applies to business inputs" such as business machinery and equipment, Drummond said. "It is the biggest contributor to the cost of capital remaining in the province of Ontario."

As a result, "it gets embedded in your export prices. It makes you less competitive on that front," he said.

The tax cascades: "By the time you buy something, it probably goes through five different layers of transactions. All of them may have attracted retail sales tax. You're taxing the tax on top of it -- it's a terrible tax design."

This ultimately hits consumers of those products in the pocketbook, Drummond said, adding such cascading can also hit services.

For that reason, the vast majority of the world's economies have moved away from such taxes and towards such value-added taxes as the HST, which only taxes the value added by the good or service produced by the business.

In addition, Ontario has an open economy, with imports counting for 62 per cent of GDP, Drummond and fellow TD economist Diana Petramala wrote in a Sept. 18 analysis of the HST.

"In competing with over 130 countries around the world which already use a value-added tax, the RST imposes a huge competitive disadvantage on" Ontario businesses, they said.

Drummond said he would like to see someone seriously argue that if Ontario were building a new tax system from scratch, it would come up with the RST it has now.

On July 1, 2010, Ontario will largely harmonize its eight per cent RST with the five per cent federal GST, leaving a 13 per cent HST. The move will be accompanied by corporate and personal income tax cuts, which begin on Jan. 1, along with various tax credits and transitional payments.

Progressive Conservative Leader Tim Hudak has declared the HST to be a "massive tax grab."

Drummond disagrees with that assessment, saying if it weren't for the $4.3 billion from the federal Conservative government, the province would lose money on the change for the first few years.

And it will hit consumers by having them pay tax on a wider array of goods and services, even though the prices for many of those items will decline.

TD Economics found a number of goods and services where the tax will be neutral:

• basic groceries
• prepared food purchased at stores
• restaurant food
• clothing
• household goods
• autos
• personal care supplies
• alcohol
• rent/mortgage interest costs/insurance
• telephone and cable
• child care services
• public transportation

Goods and services that will see their tax rate go up include:

• natural gas
• gasoline
• fuel oil and other fuels
• tobacco
• certain fees on financial products and services
• Internet access
• some non-shelter services such as cleaning and landscaping
• personal care and professional services
• taxis

"Given the list of goods and services that will be affected by the new tax, we have estimated that Ontario consumers will experience an eight-percentage-point increase in the posted tax rate on approximately 19 per cent of their expenditures," the report said, adding it means a 1.5 per cent rise in the effective tax rate.

However, that report was prepared before Finance Minister Dwight Duncan's announcement on Nov. 12 of an exemption for food purchases under $4, which will cost an estimated $325 million annually.

Again, the province is also making cuts to corporate and personal income taxes. In delivering his 2009-10 budget on March 26, Duncan said on balance, Ontarians wouldn't be paying more tax as a result of the changes.

The tax will push up the inflation rate by 0.7 per cent annually, the TD report found, adding it could take six years for the full cost savings to be passed on by businesses.

The upside? A report by prominent economist Jack Mintz (paid for by the Ontario government following competitive bidding) said the following benefits would accrue in the first 10 years of the total tax changes:

• 591,000 net new jobs
• increased capital investment of $47 billion
• increased annual incomes of up to 8.8 per cent

Drummond said if true, those are impressive numbers -- and he hasn't heard anyone challenge Mintz's analysis.

"Yes, I readily admit that the transition has some rough spots. Yes, it will increase the price of some services," Drummond said. "But I just don't see how we get to where we need to be in Ontario as a lean, competitive machine where you have any choice but to do it."