CANADA

THE NINE-PERCENT BATTLE

MARC CLARK July 3 1989
CANADA

THE NINE-PERCENT BATTLE

MARC CLARK July 3 1989

THE NINE-PERCENT BATTLE

CANADA

BUSINESS AND CONSUMER GROUPS LOBBY OTTAWA TO LEAVE THEM OUT OF ITS SWEEPING NEW SALES TAX

For months, delegations armed with earnest arguments and persuasive statistics have been making their way to Michael Wilson’s Ottawa doorstep. Their common purpose: to persuade the federal finance minister that they should be exempted from one of the most significant new Canadian taxes since the imposition of income tax in 1917. When the wide-ranging new federal goods and services tax (GST) comes into force on Jan. 1, 1991, it will tack an additional nine per cent onto the price of hundreds of millions of transactions conducted by Canadians each year. So far, no fewer than 3,000 appeals for special treatment have been lodged with Wilson’s department. Some have been strikingly original. In one case, a lobbyist representing a candymaker offered studies which, he claimed, proved that chocolate bars were nutritious enough to qualify as a (nontaxable) basic food rather than a (taxable) snack food. That appeal joined others from groups as diverse as librarians and bankers. And together they underlined the alarm that business, consumer groups and the Conservative government all share at the prospect of a new tax that will strike at the pocketbook of every Canadian consumer—and voter.

The full scope of the new tax may become evident as early as this week. Wilson needed only the approval of his cabinet colleagues to release a 200-page technical analysis detailing his proposals, a paper that he has said he would like to release before the June 30 start of Parliament’s summer recess. But the opening

shots in what promises to be a fierce battle for public opinion have already been fired. Last week, John Bulloch, head of the Canadian Federation of Independent Business (CFIB), renewed his charge that the sales tax would cripple small businesses. And in the Commons, opposition members of Parliament criticized Wilson for apparently abandoning an earlier promise that consumers would see the exact amount of tax that they pay for each purchase.

Still, last week’s criticisms were only preliminary skirmishes in what is likely to evolve into a full-fledged political war. Opposition critics, Conservatives and tax experts alike describe Wilson’s proposals as the most sweeping tax change in more than two generations. It involves removing a manufacturers’ tax first introduced in 1924 and applied to most goods made in Canada, and replacing it with a new levy that will be imposed on twice as many transactions. Last week, Wilson said that he will introduce legislation in the fall to put the new tax into effect. But already the government is preparing a $6-million-to$7-million campaign of advertising, brochures, ministerial speeches and seminars led by senior public servants, all designed to explain the new tax to business and convince Canadians of its merits. In addition, Wilson has hired Toronto-based Conservative public relations consultant Nancy Jamieson to advise him on how to avoid the political pitfalls of tax reform. Wilson acknowledged to Maclean ’s that the proposal “will be tough to sell.”

But, he added: “Intelligent people agree that the sales tax must be done. And I am willing to debate that with anyone, anytime, anywhere.”

Meanwhile, not even opposition MPs want to preserve the current manufac-

turers’ tax. That levy, also known as the federal sales tax, has grown steadily less efficient since it was introduced in 1924. It raises $17 billion a year by taxing most goods manufactured in Canada at a standard rate of 13.5 per cent. But the tax is riddled with incongruities. For one thing, although imported goods are also taxed, the rate levied on imports is lower than for competing products made in Canada. As well, Ottawa has allowed about 22,000 special interpretations of the tax, exempting athletic headbands, among other things, because they are considered to be clothing, but taxing similar bands for the wrist as sporting goods. Despite those distortions the tax still covers only about a third of the economy—and almost none of the fast-growing service industry. Because of its uneven application, according to Wilson, the tax has discouraged investment in Canada, becoming what he describes as “a silent killer of jobs.”

The new tax would eliminate many of the inconsistencies and double the size of the net. Basic groceries, prescription drugs, medical appliances and services, residential rents, day I care and most education costs I will be exempted from the new 1 nine-per-cent tax. But it would I still cover about two-thirds of

all transactions, embracing thousands of previously untaxed products and services, from baby clothes to burial fees. Wilson has acknowledged that the effect would be higher prices for many purchases, especially for services that are currently untaxed, such as legal fees. He has also conceded that the GST will cause a sharp surge in inflation of as much as three per cent when it is introduced in 1991. But Wilson’s officials say that the prices for some goods, including cars and some processed foods, should drop when the new nine-per-cent tax replaces the existing 13.5 per cent.

In contrast to the manufacturers’ tax, which is levied only on finished products, however, the new tax would be levied at each step in a product’s life cycle. In a simplified case, when a mining company sells iron ore to a steelmaker for $100, it will have to charge an extra $9 in tax—to be paid to Ottawa. When the steelmaker in turn sells metal made from the ore to an appliance maker for $300, it will charge $27 in tax, but will be able to keep the tax already paid on the ore—$9—before sending the balance of $18 to Ottawa. Similarly, the manufacturer regains his $27 when he sells a washing machine made from the steel to a retailer for $400, charging an additional $36 in tax, of which just $9 goes to Ottawa. And in the end, the consumer pays $54 in tax on top of the $600 ticket price for the washing machine. The dealer keeps his $36 and sends $18 on to Ottawa, for a total of $54 in federal revenue. The consumer is the only link in the chain to carry the full burden of the tax.

In an early attempt to smooth the introduc-

tion of the new tax, Wilson spent two years after he first unveiled his proposal in 1987 trying to persuade the provinces to combine it with existing provincial sales taxes. But when Ontario and other provinces resisted that idea, Wilson announced in April that Ottawa would impose the measure unilaterally. The result is that retailers in every province except Alberta—which has no sales tax—will face the bewildering task of calculating provincial and federal sales taxes separately, with some items totally untaxed, some taxed by one level of government but not by the other, and others taxed by both.

According to business analysts, that may be feasible for large firms with computerized pricing. But for small businesses, said the CFm’s Bulloch, it could be an accounting nightmare. Added the former Toronto fuel-oil retailer: “No government in the world has given us two retail-tax systems with two completely different bases. It is a national tragedy.” Early in June, Revenue Minister Otto Jelinek repeated an earlier pledge by Wilson that small businesses would receive simplified accounting rules and compensation for the costs of collecting the tax. That assistance to small firms could be as much as $600 a year, Bulloch said last week, adding that “every penny of it will go to accountants.”

One alternative—allowing retailers to include the new tax in sticker prices rather than having to add it on as a separate item at the cash register—might placate some small businesses, but at the cost of alienating consumer groups. Only two months ago, Wilson himself

cited the “invisibility” of the current manufacturers’ tax, which does not appear as a separate calculation for consumers, as one of its major defects. He said that when the new tax was imposed, consumers would see what they were paying. But last week he conceded that Ottawa may not have the authority to force businesses to calculate the tax separately.

In response, consumers’ advocates immediately claimed that a tax that was not clearly visible could easily be abused. Said Kathleen Stephenson, policy director for the 130,000member Consumers’ Association of Canada: “If the tax shows up on every invoice, there is a strong disincentive to raising it.” But without that political safeguard, she added, future governments bent on deficit reduction may be more inclined to increase the levy whenever they need more money. Declared Michael Walker, director of the Vancouver-based Fraser Institute, a conservative economic thinktank: “If this tax is hidden, you can be sure that in no time it will be up to the old rate of 13.5 per cent.” Walker added that he would withdraw his support for Wilson’s proposed tax if it is not made visible to consumers.

In Ottawa, opposition critics also noted that including the federal tax in sticker prices would make provincial sales taxes higher. That is because they would be levied on the total price incorporating the federal tax—an effect known among economists as tax “cascading”—rather than on the untaxed price. Indeed, Liberal finance critic Roy MacLaren said that Wilson “is leaving the provinces with no alternative but to put their tax on top of the nine-per-cent federal tax—it is double taxation.” In a province such as Ontario with an eight-per-cent sales tax, the cascading effect of a further nineper-cent federal tax would add an extra 72 cents to the cost of a $100 item. Currently, provincial sales taxes are calculated on prices that include the existing federal manufactur-

ers’ tax of up to 18 per cent on some goods.

With those controversies still unresolved, senior Conservatives said privately that they expected to face further debate over eligibilities for exemptions. In 1987, the minister proposed to forestall that problem by taxing all sales transactions—including food and medicine—but at a lower rate. That proposal, which would have delivered roughly the same revenue to Ottawa as a nine-per-cent tax on fewer transactions, won the endorsement of economists as well as the Consumers’ Association. But provincial officials and Conservative strategists convinced Wilson that there would be an enormous political cost to taxing food and drugs. Said Ottawa lobbyist Samuel Hughes, a former head of the Canadian Chamber of Commerce: “Any politician who taxes food is crazy. But once you make a single exemption, you open Pandora’s box.”

Wilson has since discovered that the box is a large one. He has received letters from piano teachers worried about the impact of the tax on music lessons, and briefs from the Canadian Bar Association arguing that legal services are a basic right and should not be taxed.

Whatever choices he makes in the policy paper expected to be released this week, or in the legislation in the fall, Wilson may already have lost the battle to render his new tax politically palatable. David Perry, senior researcher at the nonprofit Canadian Tax Foundation in Toronto, for one, said that “the idea that it will be a tax grab is firmly fixed in people’s minds.” It is a view that Wilson will have to counter convincingly if the Conservative government is to avoid feeling the full weight of his proposals—in political unpopularity—even before it counts the first sales tax dollars in 1991.

MARC CLARK with LISA VAN DUSEN in Ottawa and GLEN ALLEN in Halifax

GLEN ALLEN

LISA VAN DUSEN