BY VITO PILIECI, OTTAWA CITIZENMARCH 17, 2011
OTTAWA — A controversial new study says businesses are passing along a majority of their savings from the harmonized sales tax, but the average Ontario consumer still shelled out at least $40 more in the last six months of 2010 because of the tax.
And the impact could have been far worse if not for new tax incentives and reduced costs for businesses that have helped TO temper price inflation in Ontario, according to the report by University of Toronto economics professor Michael Smart.
Titled The Impact of Sales Tax Reform on Ontario Consumers, the study was funded by the Ontario Ministry of Finance. The province’s Liberal government was quick to promote its results on Thursday, claiming they further support the introduction of the contentious tax in 2010.
“We are on the right path, we are seeing business savings going back to consumers,” said Revenue Minister Sophia Aggelonitis. “This was an independent, third-party and peer-reviewed study. This gives us a firsthand look at the actual experiences that the HST has had.”
The report drew immediate criticism from opposition parties and at least one economist who pointed to record-high food prices, rising oil and gasoline prices, increased electricity bills and a steadily rising Consumer Price Index. They said the average Ontarian has seen little to no savings from the tax.
“This is the action of a desperate government grasping at straws,” said Peter Shurman, MPP for Thornhill and the Progressive Conservative critic on economic development. “(Ontarians) know they can’t pay their hydro bills, they know natural gas is not something they can afford do without. The HST has affected them in a very significant way.”
The study looked at consumer price indexes (CPI) of Ontario and Quebec between June and December 2010, using Quebec’s CPI as a baseline. The CPI is a measuring tool used by governments and based on price changes for a fixed basket of popular goods.
According to Smart’s study, Ontario’s CPI increased 0.9 per cent between June and July, the first month the HST was levied in Ontario. In Quebec, the CPI fell by 0.3 per cent during the same period. Smart concludes that the HST caused a 1.2-per-cent increase to prices in Ontario during the tax’s first month. The move rolled the federal goods and services tax (GST) and provincial sales tax (PST) into a single tax. The HST applies to certain items, such as hotel rooms and gasoline, that were exempt from the previous PST.
Over the past eight months, Ontario’s CPI has increased by 1.56 per cent while Quebec’s has increased by 1.39 per cent. Smart said the narrowing difference between the two suggests Ontario businesses are finding more wiggle room to reduce prices and pass along savings to consumers.
The new tax allows businesses to claim credits for the tax they pay on many goods they need. Before the HST, businesses would simply build those additional costs into the price of items on their shelves.
“We live in an inflationary environment. Prices are rising. Just looking at Ontario prices we don’t know if they are rising because of the tax or because of other factors,” said Smart. “Quebec makes a useful laboratory experiment. All of the factors driving prices in Ontario are operating in a very similar way in Quebec. There are inflation pressures all over the world and that has nothing to do with the sales tax. But, the difference in inflation rates between Ontario and Quebec should reflect the tax changes in Ontario.”
According to the study, an average Ontario household of three people paid an additional $461 in taxes during the final six months of 2010 due to the HST. However, tax cuts, credits and other measures from the Ontario government saw about $340 returned to that family. The remaining $121, or $40 per person in that household, is the actual cost of the HST between July and December, said Smart.
“People are paying more in Ontario as a result of this,” he said. “This change is not for free. There is a hit.” However, “the impact is much smaller than most people think.”
Smart believes businesses will pass further savings to consumers.
His findings were quickly dismissed by another economist who claimed the comparison of prices between Ontario and Quebec was flawed.
“Conditions in the two provinces are quite different. Ontario has suffered more in the recession than Quebec did,” said Toby Sanger of the Canadian Centre for Policy Alternatives, an independent research body. “There are a lot of factors. You can’t just compare things like that. Ontario’s rate of inflation has been higher than Quebec’s.”
The increase in Ontario’s CPI was 1.2 percentage points higher than Quebec’s in January, the same margin the two provinces had when the HST was introduced in July. The province has maintained a higher inflation rate than Quebec since September 2009.
PC party member Shurman accused the Liberal government of using the study to try to win votes in the run-up to this fall’s provincial election.
“This is a Ministry of Finance-financed study. They bought a study,” he said. “Do you think they are going to pay for a study that comes back and says, ‘No, it’s bad?’”