What’s the real problem with HST?

As expected, the Harmonized Sales Tax (HST) is becoming an issue in the upcoming Ontario provincial election.  I’m the first to say that HST was not implemented as well as it could have been in Ontario – but I’m also the first to say that HST was absolutely necessary.

I’m going to start at the beginning – the reason I supported HST even before the government announced it.  Many opponents of HST just say “why do we need this?” or “this is so business-friendly so we should just scrap it altogether.”  I won’t deny that it’s business-friendly – for most businesses.  As a service provider, it actually caused all of my services to go up in price by 8%, with the only benefit to me being increased credits on my purchases and a random $300 cheque from the Ontario government.  I’m happy to take one for the team (so to speak) on this – I’ve lost some business, and in some case simply lost some money as I didn’t adjust some tax-included prices and took the sales tax hit myself.  I can live with that.

[continues after the jump]

The old system was a mess.  No one really understood the Ontario Retail Sales Tax (commonly known as PST).  If you were ever audited, it was usually easier just to write a blank cheque to the government than to try to figure out what was going on.  This didn’t affect big business as much, since they usually had advisors who could help them both figure out the legislation and find ways to save taxes wherever possible.  But it did affect small businesses.  Many were simply not registered even though they were required to be (GST/HST rules exempt businesses taking in less than $30,000 of revenues, the PST rules required businesses earning even $1 to register and charge PST) – this ran the risk of getting ‘caught’ and assessed heavy penalties.  Those that were registered usually spent far too much time figuring out what sales were subject to PST, and what purchases could be exempted from PST.  Keep in mind that PST was assessed primarily on goods, with a number of complicated exemptions (more on these later), and the inclusion of a couple of random services.

To avoid paying PST on its purchases (since, in theory, the tax was only to be levied on the end consumer), the business should theoretically have provided its vendor permit to the vendor (which it was simultaneously required to display on its premises), which meant that most retail purchases (while theoretically not taxable) incurred taxes they shouldn’t have.  The point-of-sale exemptions also meant a lot of time wasted as most retail staff didn’t know how to deal with it.  And the rules for exempt purchases were a mess – roughly speaking, if it was going directly into a product it was making the business didn’t have to pay PST on it, but if it was being used in the office or something else not directly related, it did.  Finally, enforcement was a mess for the province – being completely unconnected from the federal systems (though there were technically information sharing agreements in place, I doubt these were used to the extent possible) meant that some businesses went through two complete audits (one federal, one provincial), with different results from both – and many other businesses were either ignored or simply slipped through the cracks.

GST/HST eliminates virtually all of these problems.  First, it’s administered by one agency (the Canada Revenue Agency, or CRA) that also administers income and payroll taxes so has some ability to quickly and easily see which businesses should or should not be registered and act accordingly – this also avoids dealing with multiple governments as a business (and a consumer, for that matter).  It means only having to register once (your GST/HST number is linked to your corporate tax number and payroll tax number so it’s easy to get connected, and the CRA has electronic services in place that the Ontario government could only ever dream of).  Except in a few very specialty areas (banking, insurance, and medicine for example), the rules for what is taxable are relatively simple – virtually all sales of goods and services.  Since GST/HST is a value-added tax (similar to systems used in Europe and Australia), only the end consumer needs pay the tax – but since it’s so complicated to provide point-of-sale exemptions, the business needs merely accumulate a total of all the GST/HST they paid in the year on purchases related to their business (in most cases this is just all business purchases rather than just direct inputs – much easier!) and claim this as a reduction of the taxes they need to remit to the government.  Finally, the $30,000 small business exemption means that somebody who does some handyperson work on the weekends for friends and neighbours doesn’t have to deal with it at all – allowing for the development of microbusiness and entrepreneurship without excessive burden.

I think that even the opposition parties (the NDP and the PCO) would agree these are all good things.  Taxes that are easier to keep track of, that are easier to enforce, and that drastically cut administrative burden for businesses of all sizes.  (I don’t really care about the big businesses in this analysis, to be honest, but both the big businesses and small ones share similar benefits in this).  The PCO has even said a number of times that they support the concept of the HST, they just opposed the timing of it.

Having explained why I think the HST system is good, and why I can’t see any particularly good reasons for the opposition parties to oppose it (other than for political gain), I’ll explain what I think the opposition parties should actually be focusing on.  HST didn’t work out well for everyone, and there may have been problems with the way it was done, depending on who you were.

I won’t address the transition – it’s too late to do anything about this.  Everyone got a cheque (you got more if you were married than if you were single) to try to cover some of the costs, but regardless, we’re here now, post-HST.

The problem I have with the debate is that it’s all about telling Ontarians that we’re paying too much for everything, and that we have less in our pockets as a result.  There is some valid support for this – for example, (almost) all services were previously taxed only at the federal GST rate of 5% and were PST-exempt.  They’re now subject to 13% HST – a significant jump.  The same is true of a few other items – the Ministry of Revenue has a great document summarizing all of these changes.  To rearrange what they’ve done, I’ll summarize it like this:

HST is higher than former GST + PST

  • Dry cleaning
  • Cleaning services
  • Electricity
  • Gas/Oil for home heating
  • Internet access
  • Home service repairs (note this only applies to the service portion – any goods provided as part of this were subject to PST already)
  • Landscaping, lawn care, snow removal
  • Hotel rooms
  • Taxis
  • Campsites
  • Domestic air travel originating in Ontario
  • Magazines purchase by subscription
  • Home renovations
  • Gasoline
  • New homes (unless purchased as a primary residence, in which case a rebate offsets most of the increase)
  • Real estate commissions
  • Massage therapy
  • Vitamins
  • Golf, gym, athletic, and other sport fees, dues, and lessons
  • Tickets for live theatre with < 3,200 seats
  • Professional services (including accountants, lawyers, funeral homes, hairstylists, etc)
  • Cigarettes
  • Hunting and fishing licences
  • Almost any other type of service

HST is lower than former GST + PST

  • Alcohol
  • Audio books
  • Admissions to sporting and entertainment events
  • Movie tickets

As can be seen – a lot of things went up, and a few things went down.  I think the things most likely to affect the average person in this list are energy costs (electric, gas), internet access, and a number of services.  If you ignore the theoretical price drop that businesses will supposedly provide due to getting bigger input tax credits and reducing administrative costs (which the government claims will virtually offset the impact – though this is something I’ve not yet seen fully substantiated), this means virtually everyone will be paying more for at least a few things.  I’m not going to argue this because I simply don’t have the data to do so – it is likely safe to say, however, that gross prices have not increased as a result of HST.

The “logical” conclusion the opposition parties draw from this is simply “let’s scrap the HST and go back to the way things were before.”  This comes more from the NDP, as the PCO can hardly suggest scrapping a system they (and their federal counterparts, albeit of a technically different party) have openly supported, at least in theory.  This has led to calls to eliminate the system, rather than to improve it.  They’re attacking the symptoms and not the problem.  Doing this was, in my view, a political game.  It won them something – something completely useless that actually eliminated some of the benefit of the HST.  They got back some of the bizarre exemptions that PST had in the first place – like $3.99 or less fast food.  They also succeeded in having the PST portion eliminated from books, newspapers, diapers, feminine hygiene products, and some children’s clothes – which I’ll admit was a good result, though I would have preferred it if the Ontario government could have negotiated this directly into the GST/HST legislation to make it completely tax-free.  But they’re still fighting for eliminating the system altogether.

As someone who supports higher taxes, in general, the “let’s get rid of it altogether” argument doesn’t sway me.  I also strongly believe in carbon taxes to discourage people from overusing (or using at all) things that are damaging to the environment.  The fact that I support HST causing higher prices on both electricity and fossil fuels (petrol / gas) is not a coincidence – it’s no carbon tax, but I also believe we should pay more for these things, and if doing so results in the government having more tax dollars to spend on government programs, then I’m happy.  In this case, most in the government are actually saying that implementing HST was approximately revenue-neutral, or even a loss, for the government (due to exemptions on some items that were not previously given for PST purposes, and the input tax credit system) – again, I’ve yet to see anyone in the Ministry of Finance (or the auditor, for that matter) give a report supporting this.

I’ll also say: I don’t feel bad for people who are average income earners (where I spent most of my life) or high income earners (where I could probably say I am now).  In 2008, 43% of Ontarians made more than $35,000 per year * (which, tellingly, says that 57% made less than this).  I’m arbitrarily setting this as a level at which I’m not going to fuss if we have to pay a few hundred dollars more in taxes – partly because it conveniently lines up approximately with the cut-off of the lowest income tax bracket.  The other reason I’m setting this threshold is that the NDP claims its opposition to the HST is to support poor families – I think that considering 57% of the population will be more than sufficient.  I’m not saying that earning $35,000 a year means you have an easy life – just that you have a bit more flexibility to choose your purchases and energy use than someone earning less than this.

Having eliminated concern for 43% of us (sorry), let’s look at the remaining 57% of people.  The claim is that they’re financially worse off now as a result of HST than they would have been under GST + PST – and this is a concern I do actually share.  Based entirely on the list above, they’re all theoretically spending more on the same things they were buying before as a result of HST.  Again, I won’t argue this.  But HST was introduced in conjunction with other changes to the tax system – one being income tax changes (which will affect many, but not all of the people in this income category), the other being changes to the sales tax credit systems.

In brief – people with low incomes theoretically do not pay sales taxes, or pay relatively little in them.  They pay sales taxes at the cash register (or on their home bills), and when they file their tax return they receive refundable credits that theoretically offset this.  Remember those GST cheques you got once a quarter when you were in school (or may still get now)?  Those weren’t just a gift from the government, they were to offset the GST you were paying, on the theory that those cheques totalled the same amount as the GST you paid during the year.

The former system gave a GST credit with a limit somewhere in the area of $250/year for a single person, which increased relative to income (to theoretically reflect increased purchases) up to a point, and then reduced as income hit a point where you were earning enough to theoretically be able to afford to pay GST.  This was paid in quarterly cheques from the CRA.  You got a PST credit directly built into your tax return, at a flat amount of $100, which was reduced by a complicated calculation based on your income – higher income meant you got a smaller portion of this credit, and most people got very little.  It was also mixed in with the property tax credit (which is based on rent paid) which just further complicated matters.

The new system basically introduced a provincial sales tax credit that is calculated similar to, but not quite the same as, the federal one – in addition to the existing federal credit.  The threshold at which the credit starts reducing is lower, and the maximum you can receive is lower (it was less than $300 in the first year – which doesn’t yield an 8:5 ratio with the similar federal credit).  However, it was better than the $100 per year – another strong argument in favour of this new system.

So, let’s consider what I’ll confess are some over-simplified examples.  I’ll make some broad assumptions here:

  • The income earned as noted in the table is the only income earned in the year.
  • Taxpayers in this range will spend exactly 100% of their income in the year on taxes, housing, and goods and services.
  • 33% of after-tax income is spent on housing (paid as rent), as this is a common financial planning recommendation.  This would lead to some unlikely results at the lower end of income, but many people earning fairly low income often live in lower-rent homes anyway (with rent geared to income, or funded by the government).  If anything, this will understate the portion of income unimpacted by HST.
  • 25% of remaining income is spent on goods and services that were subject to 5% GST only in 2009 and 13% HST in 2011, and the other 75% is spent on goods and services that were subject to 13% GST + PST in 2009 and 13% HST in 2011.  The Ontario government claims 83% of products are not subject to the increase, but it’s probably safe to assume those with lower incomes are spending a higher portion of their income on home energy costs than the average person.

I plugged all of this data into my tax software to come up with some estimates – please don’t take any of this as professional advice; it’s just ballpark calculations to demonstrate my point.  I’ve categorized the first three ranges into employment income and social assistance income because social assistance is generally tax-exempt, but it does affect some of the credits.

These calculations are for single people under 65, who are inherently disadvantaged for all of our tax systems (another rant for another day).  I’ve used 2009 and 2011 to avoid the complication of the mid-year tax change in 2010 – 2009 and 2011 are before-and-after years.  There have also been changes to federal taxes, of course, so the only total I’m going to come to is the taxpayer’s net Ontario tax burden – the federal taxes are just necessary to determine the amount of disposable income (if anything, since federal taxes have gone down, disposable income has gone up, meaning more money spent on sales taxes).  Finally, the Ontario property tax credit was enhanced to include a home energy component – but this was basically just a renaming of an already-existing component of the former property tax credit, and an arbitrary extra $50 was added to the end of the calculation – I’m going to assume this extra $50 is not part of the whole sales tax transition, and that it was simply acknowledging an increase in property taxes since the credit was last revised.  I’ve also ignored CPP and EI contributions when calculating the disposable income – I recognize this is a flaw and if I have more time in future I may go through it all again, but don’t expect drastically different results.

(Click the zoom buttons at the bottom to be able to read this).

As can be seen – based on these assumptions, up until an income level of $20,000 or so, the Ontario tax burden has actually gone down from 2009 to 2011.  After this, however, the burden has gone up.

What does this mean?  Under the system rolled out, people earning about $20,000 or less are paying less to the Ontario government in taxes (again, all this is based on these assumptions, which I hope are reasonable) than they were before.

To me, this gives some context in which to frame the discussion.  Instead of saying “OMG THE SKY IS FALLING WE’RE ALL PAYING SO MUCH MORE IN TAXES ESPECIALLY THE POOR PEOPLE,” let’s take a deep breath and consider the tax policy.  Obviously, people earning more than $5,000 or so are still paying taxes.  Let’s discuss the policy behind that – do we believe that people earning $10,000 a year (who we’ve obviously decided are earning little enough not to pay income taxes) should be paying sales taxes?  Sure, they’re paying less in taxes now (I don’t think changing the assumptions would drastically change this) than they were before – but is it enough? Is it too much? Should they be paying more?  Less?  Let’s have THAT conversation.  What about people earning $30,000 a year – they’re paying more in taxes, in total, should they be?  Should the HST have taken a 1% reduction like it did out East?  Should we cut it by 1% now but leave the credits the same?

Let’s stop panicking over a perception of paying more taxes (admittedly, we’re paying more ‘visible’ taxes since they’re levied at the cash register), and start addressing some real concerns.  If the opposition parties want to complain that people with low-incomes are still paying sales taxes even though they think they shouldn’t be, then I do wish they would say that.  Going back to the previous system actually puts many of these people back into a worse position (unless you roll back the HST without rolling back the matching credit).  It also puts us back into a system that was a complete and utter mess.  I’m tired of hearing populist proposals that do nothing to serve the people they claim to be protecting.  Let’s have a real discussion about the real issues – and stop with the pandering.

One final thought: I’d like to be challenged on this – if anyone has stats to suggest some better assumptions for the calculations, please post links and I’ll update the spreadsheet to make use of these.  If anyone can see errors in my calculations or logic, please point them out – I think it’s important to again acknowledge that these are rough figures and that I am, of course, not providing an expert opinion here but trying to demonstrate the areas we really should be focused on in all of this debate.  I’d love to crowd-source some better information to improve this.

* the original post said 43% of Canadians, which is erroneous – this statistic was of Ontarians, not Canadians, and has been corrected.

2 responses to this post.

  1. […] I mentioned in my HST post, couples got an HST transition benefit of $1,000, where singles each got $300.  $300 x 2 does not […]


  2. […] for keeping the Harmonised Sales Tax (HST).  I’ve already explained why I believe the system is not the problem – I would support reductions in the rate, but not […]


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