HST will hike prices by 0.7%, TD says

Paul Vieira, Financial Post





Consumers in Ontario and British Columbia will see prices move up 0.7% on a permanent basis due to the transition toward a harmonized sales tax, says a report released yesterday from economists at Toronto-Dominion Bank.



Still, the report's authors indicate the increase in prices will be not as bad as politicians opposing harmonization have claimed.



"Yes, it is true that the policy will have a positive permanent impact on overall consumer prices, but it will not be as much as many fear," say the authors, Don Drummond, TD's chief economist, and Diana Petramala.



"The increase in the consumer-price level needs to be put into the broader context of the widely held view, with which we concur, that a value-added tax is a more efficient tax than the provincial retail sales taxes currently in place in both Ontario and British Columbia."



Both Ontario and British Columbia will harmonize the GST and their retail sales taxes with a single harmonized tax, beginning on July 1 of next year, as part of an effort to make businesses in these provinces more competitive by lowering the effective tax rate on business inputs. The Ontario rate will be 13%, whereas the B. C. rate will be 12%.



The study estimates the move will reduce the cost of doing business by a total of $6.9-billion in Ontario and British Columbia, as inputs used by firms to make goods will not be taxed as they have been through several stages of the production cycle.



However, "the tax burden will shift from businesses to consumers, who will now pay the harmonized tax on a broader array of goods and services than before," the report said, adding the overall price level will increase by 0.7 percentage points in both provinces.



"While consumers will find themselves paying more tax on certain goods and services, the hope is that the higher costs will be offset by stronger sustainable income growth," it added.



Businesses are likely to pass on savings to consumers in lower pretax prices, the economists said, citing evidence of what happened when New Brunswick, Nova Scotia, and Newfoundland and Labrador moved to a harmonized tax in the late 1990s.



Home builders are likely to pass on savings from avoiding tax on inputs such as hammers and lumber. Hence, TD calculated, the price of a new home priced at $400,000 could cost as little as $387,000. Further, residents in Ontario and B. C. will be eligible for tax credits on home purchases, covering up to $400,000 of the acquisition.



On a national basis, the harmonized tax will permanently push up prices by 0.4%. However, the report noted the Bank of Canada does not include indirect taxes when calculating core inflation. (The central bank sets rates to ensure inflation hits a 2% target.)