On disharmony

As we await the terms of B.C.'s impending HST agreement, it's worth noting as well that some of the provisions of the preliminary deals seem to have received relatively little attention beyond last week's musings from Dalton McGuinty.

To give some indication as to how harmonization figures to complicate the relationships between provincial and federal governments, Ontario's preliminary agreement includes:
- a requirement that Ontario not raise or lower its sales tax rate for two years;
- a provision allowing for sales tax rebates on a limited amount of the sales tax base;
- a provision allowing Ontario to limit business purchase rebates on provincial sales taxes on a "select list of items" for up to five years, with a three-year phaseout period after that;
- a requirement that the federal government secure Ontario's agreement before reducing the GST so as to affect Ontario's sales tax revenues by more than 1%, or compensate Ontario for its failure to do so.

The first point worth noting is the number of moving parts and complexities involved in harmonizing the taxes which should make the public all the more skeptical of any claims of administrative efficiencies. But more interesting in the long run is the ability of each level of government to hamstring the other's actions.

For any province, the agreement effectively ties its hands to the extent the federal government wishes to make radical changes to the GST's structure which don't adversely affect its revenue base.

By way of example, let's say the Harper Cons were to decide that the current tax system isn't quite regressive enough for their liking and that the GST should be applied to basic groceries. At that point, Ontario would have effectively no recourse against the fact that its 8% provincial tax would be applied to the same items as well. At best, it would be able to set up a rebate within the 5% limit to make use of the sales tax administration system, then try to set up countervailing programs on its own - but in the absence of any remaining structure to actually deal with sales tax at the point of sale, that would be at best an inexact and costly effort which would basically require re-establishing exactly the type of unit which the HST is supposed to eliminate.

In contrast, the province is somewhat protected against any reductions by the 1% of revenue rule. But that would still allow for a steady erosion of provincial income without any compensation if a federal government plans to cut away as much of the tax base as it can without hitting that trigger point - and for the next two years at least, the province wouldn't even have the ability to raise its own tax level to compensate, potentially giving the Harper government significant ability to add to provincial deficits.

At the same time, though, the rule also creates a substantial disincentive for the federal government to carry out any reduction for specific types of goods which might reach the 1% threshold. So ideas such as, let's say, removing the GST from family essentials would potentially become unworkable for a federal government which would not only lose tax revenue of its own but also have to pay provinces to carry out the effort.

So the ultimate effect of harmonization is to make it more difficult for either level of government to take into account the needs of its constituents. And while that may be just fine in the view of the likes of Harper, McGuinty and Campbell, there's plenty of reason for Canadians to be all the more unhappy with the HST scheme.