A surprising thing happened in late March: The Ontario government budget made dramatic headlines. It had plenty of gloomy forecasting — seven years of deficits, including an eyebrow-raising $14.1-billion deficit next year — but at its heart lay at least one piece of sound policy: harmonizing the 8% provincial sales tax with the 5% federal goods and services tax. Harmonization will take effect on July 1, 2010.
It was not an easy move. Dalton McGuinty’s government quickly came under fire for hitting consumers with a tax increase during a recession. But to cushion the impact, Ontario has negotiated a sweetheart deal with the federal government, which will kick in $4.3 billion toward the harmonization effort over two years. And the controversy around the move should not obscure its eminently laudable goal: policy that’s designed to reduce the tax burden on Ontario’s businesses while making them more competitive.
As Roger Martin, dean of the Rotman School of Management and chairman of the Toronto-based Institute for Competitiveness and Prosperity, has pointed out, Ontario’s sales tax is charged on new business investments. He estimates that a third of the tax is paid by businesses making investments or purchasing goods for operations. By switching to a value-added tax, Ontario will eliminate that burden, freeing companies to invest more and help boost productivity.
When Quebec and the three Atlantic provinces made this conversion, they saw business investment jump 11%. And in one of the provinces hit hardest by the downturn in manufacturing, harmonization is overdue. Martin’s institute estimates that in 2007, businesses in Ontario invested $1,430 per worker — 16% less than their competitors in large U.S. states. Ontario workers can create more value, and earn higher wages, only if they are supported by the most advanced software and equipment.
If Ontarians want better incomes and more secure jobs, more investment from business is essential. Harmonizing the provincial sales tax with the goods and service tax will help make that happen.