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Manitoba reconsidering tax harmonization Add to ...

Manitoba is pondering whether to jump on the bandwagon and merge its provincial sales levy with the federal GST in light of British Columbia's surprise decision to embrace this politically risky policy.

It's part of a ripple effect in provincial taxation policy after Ontario, the country's most populous jurisdiction, announced this spring it will make the switch in 2010.

This measure, which lowers the cost of doing business for firms, is nevertheless potentially dangerous for governments to enact during a recession because it increases total sales taxes paid by consumers on many goods and services, from haircuts to dry cleaning.

Manitoba Finance Minister Greg Selinger, whose government rejected Ottawa's pitch to harmonize last year, said yesterday that it's only fair now to give "serious consideration" to making the switch, given the number of provinces signing up for it.

"We're just considering it now for the first time with fresh eyes since what happened in Ontario and British Columbia," he said, adding that the trend "does make you have to think about it again."

B.C. announced late last month - about 10 weeks after a provincial election - that it would create a single harmonized sales tax (HST) to ensure it remains competitive with Ontario. By July 1, 2010, six provinces will have a harmonized tax.

"This was driven by the Ontario decision," B.C. Finance Minister Colin Hansen said.

Manitoba's Mr. Selinger cautioned his comments are not a commitment to proceed. He needs to study the matter.

The province's Premier, Gary Doer, said he is still concerned about the "redistribution" from consumers to business inherent in harmonization.

Federal Finance Minister Jim Flaherty has been coaxing provinces to climb on board because of the benefits for attracting investment. He's offering a sizable inducement to switch: a cash bonus worth 1.5 percentage points of the gross goods and services tax collected in that province.

In B.C.'s case that's a $1.6-billion payment from Ottawa, an amount Mr. Hansen says may help his province climb out of budget deficit faster.

The economic benefit of this blended levy is the big tax break for businesses, which in B.C.'s case will pay $1.9-billion less per year in sales tax. That's because the new levy will only apply to goods and services the GST now covers. Under the previous regime, firms paid provincial sales tax on inputs such as machinery and equipment; under the HST they won't.

But consumers will pay HST on many items that were exempt from provincial sales tax, from movie tickets to bicycles. In theory, some of the tax savings by business should be passed on to consumers, but the B.C. move has nevertheless sparked a political backlash.

"It's a tough sell," Mr. Hansen said. "It's good economic policy; it is very challenging politics."

Both B.C. and Manitoba say part of what intrigued them to take a second look at harmonization was how Ottawa sweetened the pot in its deal with Ontario by allowing provinces more flexibility in setting up the HST and exemptions from it. Exemptions allow provinces to shelter some things - such as children's clothing and car seats - from the full tax and help lower political blowback.

As in its deal with Ontario in March, Ottawa is allowing provinces to offer exemptions from the provincial portion of the HST - up to an amount worth 5 per cent of the GST tax base in that jurisdiction.

B.C. for instance is using some of this exemption authority to shelter gasoline and diesel fuel from the provincial portion of the new HST.

Manitoba, Saskatchewan and Prince Edward Island have not yet harmonized their sales tax with the GST. PEI Premier Robert Ghiz has said that he will need a richer deal than Ottawa is currently offering.

Quebec, Nova Scotia, New Brunswick and Newfoundland have already harmonized their sales taxes with Ottawa's.

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