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Is HST Still A Good Idea?

Much has been written about the impact HST will have on certain financial services [1] but what about the impact to other product and services. Does HST still make sense?

HST Streamlines Sales Tax

Most consumers (not investors in mutual funds however) will not be impacted by harmonization of the GST and provincial sales taxes.

In Ontario, consumers pay 5% GST and 8% PST on the purchase of most goods and services. The combined sales tax is 13% now and will still be 13% after HST is implemented.


What Changes With HST?

The big change with HST is behind the scenes. Under the current retail tax systems in B.C. and Ontario, business must pay the PST on their purchases of supplies. This payment of PST by the business has an impact on consumer prices and has elements of double taxation.

With HST, businesses will charge HST on their sales of goods and services but will be able to claim a credit (known as an input tax credit) for HST charged on their purchase of goods and services. This means that the business ends up remitting the difference to the government.

This is actually good for the average consumer. Read on to find out why.

Government Administration Savings

The harmonization of the PST and GST will be administered by the federal government. Since the federal government is already administering the GST, the additional cost to add B.C. and Ontario’s HST will result in a lower overall cost (i.e. it will cost the federal government less to administer the HST than it does for the provincial governments to administer separate PST’s).

The Current System Spurs Higher Prices

From an economic point of view, the payment of PST is a business expense and reduces profit margins. To compensate for a reduced profit margin, the business must increase prices to compensate for the lower margins.

Since the HST system allows business to eliminate the cost of PST, their profit margins will increase. While this effect will probably not translate into an immediate reduction in prices, prices should increase at a lower rate over time.

Stated differently, the amount you pay plus HST will probably be the same as the price you paid with GST and PST but prices would not increase as much going forward, at least until the saves from harmonization filter through the economy.

The Current System Taxes Sales Tax

As I mentioned above, PST is a business expense and this expense translates into higher prices charged by business. When the business sells its goods and services, the end consumer pays the full PST and GST on the businesses input portion of the PST.

By eliminating or reducing the PST for the business, this double taxation is effectively eliminated.

Final Thoughts

I’m not debating whether we need sales taxes or not, but rather if we are going to have sales taxes, they should be transparent and eliminate double taxation.

Again, over the long term, harmonization is good for the economy!