McGuinty, the CCPA and the HST

Ontario Premier Dalton McGuinty has taken a shine to the Canadian Centre for Policy Alternatives (CCPA). Over the past month, he and other Liberals have repeatedly cited it.

Indeed, McGuinty invoked the CCPA’s name four times in the provincial legislature on February 17. However, he first did so the day before that:

Ms. Andrea Horwath: Can the Premier explain why, when so many people are struggling, his biggest priority is a $4.5-billion tax cut for some of Ontario’s richest corporations?

Hon. Dalton McGuinty: There are two independent reports I want to recommend to my honourable colleague. One is from Jack Mintz. He works out of Calgary. He tells us that our package of tax reforms will lead to nearly 600,000 more jobs over the course of the next 10 years.

Now, my colleagues don’t appreciate Dr. Mintz, but I would then instead refer them to a report prepared by the Canadian Centre for Policy Alternatives, and I think the title says it all. It says, Not a Tax Grab After All: A Second Look at Ontario’s HST. I would strongly recommend both of those reports to my honourable colleagues. Our tax reforms, in fact, cost the treasury billions of dollars over the first two years.

McGuinty is obviously incorrect in suggesting that the CCPA supports his whole tax package, which includes a deep corporate income tax cut. The CCPA has published many pieces opposing corporate tax cuts (including a few by yours truly).

The more specific claim, which the Liberals have also made in campaign literature, is that the CCPA supports the Harmonized Sales Tax (HST). The following letter from the CCPA clearly refutes that claim:

March 1, 2010

Glen Murray, MPP
Toronto Centre
Rm. 330, Main Legislative Bldg
Queen’s Park
Toronto, ON M7A 1A4

Dear Mr. Murray:

Your campaign pamphlet for the recent Ontario by-election has recently come to my attention (see attached).

It claims that the Canadian Centre for Policy Alternatives supports the Ontario government’s Harmonized Sales Tax (HST) package.

This is incorrect for the following reasons:

Firstly, the CCPA as an organization does not take policy positions. Just as the pamphlet does not claim the TD bank supports the HST, but rather TD economist Don Drummond does, you should have attributed purported support to the authors of the CCPA study, U. of T. economists Ernie Lightman and Andrew Mitchell. (Contrary to your pamphlet, the CCPA is not “an economist”.)

Secondly, the paper focused on the narrow question of the net distributive impact of the combined personal income tax rate and credit changes in the HST. It concluded that for most low-income households, the tax and credit savings offset the HST increase. It did not take the position as to the desirability of the HST as such. It also raised concerns about the impact on First Nations and seniors who do not benefit from the credit increases.

Accordingly, it is not correct to state that the CCPA supports the HST, or indeed that the authors of the paper in question do so, and I would request that your campaign issue a statement correcting the error.

Sincerely,

Bruce Campbell
Executive Director
Canadian Centre for Policy Alternatives

While we wait for the Liberals to issue that statement, it is worth reviewing what the paper in question actually stated. As Bruce notes, Not a Tax Grab did not conclude that the HST is a beneficial public policy. Rather, it argued that the HST – combined with the accompanying personal income tax cut and credits – is “not a tax grab” for the provincial treasury or from Ontario households.

A quick look at the provincial budget confirms the first point: the harmonization process will not increase ongoing provincial revenues. Indeed, I made this point in testimony to the Ontario legislature’s finance committee a week before Not a Tax Grab was released.

Most of the additional sales tax collected from consumers will be lost by not collecting sales tax on business inputs. The HST alone was projected to raise annual revenues by only $2.2 billion.

It will raise even less because the provincial government has announced some new exemptions since the budget. Meanwhile, the accompanying personal income tax reductions will lower annual revenues by $2.3 billion.

However, concluding that harmonization will not increase overall provincial revenues is different than concluding that it will not cost households. One can summarize Not a Tax Grab’s two conclusions with simple equations.

1.) Revenue Neutrality for the Government:

Sales Tax Increase for Consumers = Sales Tax Cut for Business + Lower Personal Income Tax

2.) Financial Neutrality for Households:

Sales Tax Increase for Consumers = Lower Personal Income Tax

The only way both equations could be correct is if “Sales Tax Cut for Business” costs nothing. In fact, the HST will give business input tax credits worth $4.5 billion annually. Since the budget indicated that the HST will net $2.2 billion annually, the sales tax increase for Ontario consumers would have been $6.7 billion annually.

Ignoring the post-budget exemptions, the first equation is about right ($6.7 billion = $4.5 billion + $2.3 billion). However, the second equation is way off ($2.3 billion obviously does not offset $6.7 billion). The only way to make the second equation work is to assume that businesses pass all of their input tax credits along to Ontario consumers through lower pre-tax prices ($6.7 billion – $4.5 billion = $2.3 billion).

As The Toronto Star eagerly reported, Lightman and Mitchell initially denied making this crucial assumption to reach their conclusion. However, they had done so implicitly by treating $2.2 billion (or its calendar-year equivalent) as being the HST’s total cost to Ontario households ($6.7 billion – $4.5 billion = $2.2 billion.) To the CCPA’s credit, it revised the paper to acknowledge this rather extreme assumption.

I am inclined to interpret Not a Tax Grab as a lower-bound estimate of what households will pay. One could also generate an upper-bound estimate by assuming that businesses pass none of their savings along to Ontario consumers.

Starting from the premise that consumers will pay $2.2 billion more sales tax, Lightman and Mitchell estimated a cost of $359 for the average household. That sales tax increase would be almost totally offset by the income tax reduction of $334.

The upper-bound assumption would be that consumers pay $6.1 billion more sales tax ($6.7 billion minus the exemptions announced since the budget).  For the average household, that would imply a cost of about $1,000, of which reduced income tax would offset a third.

The truth will undoubtedly lie somewhere between $359 and $1,000. Competitive pressure will prompt some businesses to pass along their input tax credits through lower prices, but some of those savings will flow to consumers outside the province. Other businesses will simply pocket the  credits, leaving pre-tax prices unchanged.

Higher taxes on households would be easy to justify if they were reducing the deficit or funding better public services. I suspect that most CCPA staff and research associates would endorse such a tax increase.

In fact, harmonization will reduce annual revenues by $0.7 billion because the input tax credits paid to business ($4.5 billion) exceed the net additional tax paid by households ($6.1 billion – $2.3 billion). The corporate income tax cut will reduce annual revenues by a further $2.4 billion. To quote McGuinty again, “Our tax reforms, in fact, cost the treasury billions of dollars.”

King Louis XIV’s finance minister, Jean Baptiste Colbert, famously quipped, “The art of taxation consists in so plucking the goose as to get the most feathers with the least hissing.” Conversely, the McGuinty government has managed to provoke a full-blown tax revolt without gaining any additional revenue.