Canada - Tories plan to combine G.S.T. and P.S.T.

The federal government is preparing a plan to harmonize retail sales taxes across Canada in a move tax experts suggest is the biggest single step Ottawa can take toward improving productivity in this country.

The Conservatives will encourage the five provinces that do not have harmonized sales taxes -- Ontario, British Columbia, Saskatchewan, P.E.I. and Manitoba -- to take part by setting up a $5-billion trust fund that would compensate them for lost revenue over the phase-in period.

Ottawa is awash with cash this year from the federal surplus, which is on track to set a record, and is said to be keen to make a harmonization announcement coincidental with the lowering of the GST to 5% -- an election commitment the government reiterated in this week's Throne Speech.

Harmonization of sales taxes was promised by the government in the federal budget earlier this year, but it has moved up the agenda in recent months. It marks an attempt to outflank the Liberals, who have promised their own plan to reduce corporate taxes below the rate previously pledged by the Conservatives.

A spokesman for the federal Finance Department said the government thinks harmonization is worth pursuing because it makes businesses more competitive.

"In short, the government thinks it's a good idea," he said.

Canada has the highest marginal effective tax rates of all the Organization for Economic Co-operation and Development countries, in part because provinces levy sales taxes on such business inputs as machinery and the equipment companies need to increase their output.

Under a harmonized tax, firms would not pay that levy on capital equipment, a move economists believe would encourage investment.

The downside is that consumers lose out if goods and services that were exempt from provincial sales tax -- such as haircuts and housing sales -- become subject to a harmonized tax.

Wes Sheridan, the provincial treasurer of P.E.I., which has held "exploratory talks" with Ottawa on harmonization, has said that while island businesses would benefit from a harmonized tax, consumers might not. Electricity, heating oil, clothes and shoes, which are all PST exempt, might be covered by a new value-added tax.

This political blow could be softened if the decision to harmonize came at the same time as Ottawa cut the GST.

Economists suggest that a harmonized rate would save businesses in Ontario alone about $1-billion in taxes, while the construction industry would save a further $1-billion.

Consumers could see some costs rise -- for example, housing is exempt from provincial sales tax in Ontario, but house buyers might have to pay an extra $700-million every year if a newly harmonized tax included housing sales.

Michael Smart, a professor of economics at the University of Toronto, said prices would likely come down over time to reflect the tax savings.

"The work I've done on the Harmonized Sales Tax in the Atlantic provinces suggests that if you cut taxes on business inputs it quickly results in lower consumer prices," he said.