Premier Sellinger’s decision to increase the provincial sales tax to 8 percent has hovered over provincial politics like a dark cloud for more than a year. The issue won’t go away. Sellinger himself admitted that the lingering unpopularity of the tax increase contributed to the crushing loss of mayoral frontrunner and NDP stalwart Judy Wasylycia-Leis in the recent Winnipeg election. That loss was likely part of what precipitated the unprecedented cabinet revolt. The erstwhile cabinet members have claimed that Sellinger’s decision to increase the sales tax sowed the seeds of dissension. The issue is snowballing to the point that the next election might end up being the equivalent of a referendum on that decision. The status quo seems untenable. There is, however, an option that could potentially allow the Premier – or his successor – to save face without bleeding revenue: harmonizing the provincial sales tax with the GST.
Premiers McGuinty and Campbell took an immense amount of heat for their decisions to harmonize their provinces sales taxes with the federal GST. The controversy stemmed from the fact that their provincial sales taxes contained a number of exemptions that the GST did not. Therefore, voters perceived the moves as tax increases. BC voters went on to overturn their provincial HST in a referendum. Despite the unpopularity, the real defect was that neither premier bothered promoting the idea in advance.
There is no inherent reason to oppose sales tax harmonization. It would eliminate the need for businesses to comply with two different sales tax codes that apply to different items and contain different credits. While seemingly trivial, it creates a lot of red tape for businesses. As an analogy, consider if Canadian residents had to file separate provincial and federal income taxes. It would cost residents more time and money, and impose needless administrative costs on the provinces. That’s why the Canada Revenue Agency collects income taxes on behalf of the provinces, rather than each province duplicating that effort.
While harmonization is an obvious choice in the abstract, there are some details that have raised concerns about harmonization. For instance, while the federal government would provide some one time transitional assistance to offset revenue losses, a 2009 study by the Department of Finance found that when the tax is fully phased in, it could cost the treasury roughly $400 million annually. Out of $2.2 billion in sales tax collection, that is substantial, though that lost revenue would be offset to an extent as the economy grows. It would be a net decline of $140 million relative to 2013-2014 revenues excluding the PST increase.
While that $140 million number may seem large, even though it is less than 10 percent of sales tax revenue, nearly half of it would be a result of tax rebates for lower income earners, which would actually make the tax system more progressive. Contrary to the argument that harmonization would hurt low income earners, it would actually help them.
Studies of the impact of harmonized sales taxes in Atlantic Canada and Ontario unambiguously show that businesses end up passing on some of the savings to consumers. The Department of Finance estimated that administrative savings to business and government would total roughly $52 million annually. It’s hard to argue that forcing businesses and governments to spend tens of millions of dollars on duplicating paperwork is an efficient arrangement.
There aren’t many tax reform packages that could simultaneously reduce the burden on businesses and lower income earners without any real downside.
Harmonizing the sales tax is a credible alternative to simply cutting the sales tax. It would cost more revenue, but it would also be more progressive. It could be sold as a package that would both foster economic growth, and give a break to working class Manitobans. It would also go some way to salvaging the argument that the PST increase was a necessary contingency to deal with the flood, not a permanent tax increase.
The sales tax debate isn’t going away any time soon. Rather than simply debating reducing or maintaining the current rate, someone should show some leadership and present harmonization as an alternative. Rational tax policy isn’t a great slogan, but Manitobans deserve more than soundbites.