CANADA

Desperately seeking a way out of the GST

Paul Martin faces a battle to replace the controversial sales tax

MARY JANIGAN April 15 1996
CANADA

Desperately seeking a way out of the GST

Paul Martin faces a battle to replace the controversial sales tax

MARY JANIGAN April 15 1996

Desperately seeking a way out of the GST

CANADA

Paul Martin faces a battle to replace the controversial sales tax

It was an encounter between Finance Minister Paul Martin and some of his toughest critics on the Goods and Services Tax—his own caucus members.

In two separate sessions on March 27, Martin delivered a special briefing to Liberal MPs on his progress in keeping his party’s promise to “replace” the despised GST before the next election. The MPs were impatient, frustrated and panicky. But as Martin pointed out when he summarized their 20 suggestions, they cannot agree on an alternative. Some simply want to abolish it— and forfeit nearly $18 billion in annual revenue. Others want to replace the lost revenue with a surtax on personal income, hikes in corporate or payroll taxes, or a personal expenditure tax. In the end, after hours of fruitless debate, the MPs merely agreed to continue Ottawa’s drive to harmonize the GST with provincial sales taxes. But few left the meetings feeling content— or secure. As Ontario Liberal MP Carolyn Parrish told Maclean’s: “We could get killed by the Reform party if we don’t get our act together. Half of my riding is going to be hard to win, especially if we don’t do something about the GST.”

The spectre of Reform candidates waving copies of the Liberals’ broken promise has put new urgency into their drive to do something, anything, about the GST. Before the end of April, Martin hopes that the four Atlantic provinces will agree to harmonize their sales taxes with the GST, just as Quebec did in 1991. But apart from that, Martin has made pitifully small progress. Ontario, which accounts for almost 40 per cent of all economic activity in Canada, is angry about Ottawa’s tendency to penalize Ontario taxpayers in order to transfer funds to poorer provinces. As a result, Maclean’s has learned, Ontario is stalling on GST reform until Ottawa deals seriously with its complaints. Talks with Manitoba and Saskatchewan are going nowhere. Alberta adamantly opposes any sales tax. And British Columbia’s NDP government § will not even consider the matter on the ¡L brink of a provincial election. As a senior i federal finance department official ruefully remarked: “It is a big uphill battle because it is a big, big change.”

The enormity of that change has already left many consumer and business groups with decidedly mixed feelings. The introduction of the GST on Jan. 1, 1991, was an economic nightmare: overnight, Canada became the only country in the world with two separate sales tax regimes. Harmoniza-

tion would unite the GST with the provincial sales taxes so there would be one base, one set of rules, one collector and one single rate of either 14 or 15 per cent in each province. But there are problems: like the GST, the PST would apply to services. Consumers would quickly find themselves paying more tax on everything from haircuts to legal fees. As Catherine Swift, president of

dle 87,000-member Canadian Federation of Independent Business, puts it: “There is no black-and-white answer on this. Part of the problem is that if you don’t get something right at the outset, people get used to the devil that they know.”

The devil that they know is a monster. Each PST has a different base, with rates ranging from 12 per cent in Newfoundland to seven per cent in Manitoba and British Columbia (the exception is Alberta, which has no PST). The GST, in turn, applies to a different base than each PST: it hits all children’s clothing, for example, while the provinces offer exemptions. In a landmark report last December, the Canadian Institute of Chartered Accountants calculated that Ottawa spends $250 million each year to administer the GST—and the provinces spend another $100 million to collect their own sales taxes. Businesses, in turn, spend a staggering $600 million to $1.2 billion to comply with the GST—and $400 million to $700 million to collect provincial sales taxes. “What we have is an abomination,” says David Perry, senior research associate at the Canadian Tax Foundation. “It has to be changed.” In theory, Ottawa’s proposed changes would be beneficial to the economy. The chartered accountants’ report calculated that governments and businesses could save at least $500 million each year in administrative and compliance costs with a single national sales tax system. In addition, businesses could lower their production costs because they would not have to wrestle with layers of PST charges. Theoretically, Canadian exports would be more competitive and consumers would pay less for domestic goods.

Still, in the short term, few consumers would thank their governments. It would be months, perhaps years, before the full business savings translated into lower product prices. Meanwhile, consumers would face PST on services, which now constitute 65 per cent of the value of the economy. Every service from manicures to pet grooming would cost more. Marnie McCall, policy research director at the Consumers’ Association of Canada, notes that harmonization would likely in-

crease the tax burden on most middleincome Canadians. Ottawa’s plan would also preserve all of the current GST exemptions such as food, which have turned the GST into an accounting horror. Said McCall: “If we have to have consumption taxes, we should tax everything, including food, at the lowest possible rate, and provide rebates for lower-income people.”

To placate consumers, Ottawa is trying to lower provincial rates. But that attempt could stretch the generosity of richer provinces to the breaking point. In Atlantic Canada, Ottawa has proposed a combined 15-per-cent national sales tax: that is, seven-per-cent GST and eight-per-cent PST. But the four provinces’ sales taxes are all higher than that, starting at 10 per cent in Prince Edward Island. As a result, even though the provinces would slap new taxes on services, they would lose money because of the lower overall rate and new business deductions. As partial compensation, Ottawa has offered $1 billion over the next three years—another transfer from general revenues to poorer governments. As University of Alberta economist Ken Norrie warns: “It does seem a rather blatant attempt to implement one of the Liberals’ proposals: take the hardest-pressed region and offer inducements.”

It will take more than money to placate Ontario. Under harmonization, that province would collect up to $2.5 billion more than it now gets from its eight-percent PST. It could actually lower its rate by one per cent and still make the same amount of money. But Ontario is determined to extract the maximum reward for going along with Ottawa’s proposals. Provincial officials point out that federal transfers provide less money per capita to richer provinces than to poorer ones for social programs. Ontario, they say, is simply treated as a cash cow for such programs as Employment Insurance. Moreover, the province is furious about Justice Minister Allan Rock’s recent warning that Ontario’s social welfare cuts mean “you take a chance with your safety on the street.” In response, a senior Ontario official told Maclean’s: “Rock’s comments were offensive. First, they cut their payments to us. Then they start attacking us when we, in turn, have to cut. There are a lot of connected issues: you cannot solve the GST without looking at them.”

For the Liberals, such talk provokes despair: without Ontario’s participation, it will be extremely difficult to convince the western provinces that harmonization is worth the political pain. Ontario MP Parrish says that Ottawa is “still hoping for a miracle.” Barring such an event, the Liberals may be stuck with large payments to Atlantic Canada, consumer wrath and a promise still largely unfulfilled.

MARY JANIGAN