Tuesday, January 1, 2008

Forget Québec? My point exactly!

I've stated before here that I would have preferred broad based income tax relief, with special attention to families and low-income seniors, to a GST cut. But it's a reality, and whether we like it or not the GST has now been cut to 5%.

One unintended consequence is the effect it will have on the revenue situation for at least one province, Québec. Like three of the four Atlantic provinces, it has harmonized its sales tax (the TVQ) with the GST. However, rather than being an alongside tax, Québec cascades its sales tax. So the stated rate of 7.5% is actually somewhat higher. When the GST was 7%, the TVQ effectively was 8.025%. But with cuts in the federal tax to 6 and now 5%, the effective TVQ dropped to 7.95 and now 7.875%. So what, some readers may think -- turns out Québec gets the best deal of all, a 2.15% cut in sales tax instead of 2%.

But it is a big headache for Jean Charest. Having had to have been bailed out by PMS so he could finance a long overdue provincial income tax cut, offset partly by greater social and infrastructure spending as demanded by Super Mario Dumont as the price for avoiding a non-confidence vote, Charest more than other Premiers has to count every penny. Québec is finally running a surplus but just. By its own admission, it lost about $520 million in revenue from the first GST cut; then they cut income taxes by a billion. (It was necessary to keep up with the other provinces which had cut theirs; but the timing so soon after an election was highly suspicious.)

And losing about half billion won't make it any easier.

This could have lessons for Ontario as well. It as well as PEI and three of the four Western provinces have refused to harmonize their sales taxes with the federal one. (Alberta and the territories, of course, have no sales tax at all.) And bluntly, we're all sick and tired of the rob Peter to pay Paul strategem. Stable revenue sources should mean just that. I don't think the harmonized provinces agreed to do so just to get jerked around. And the other provinces, all provinces actually, should demand a quid pro quo: my preference would be for increased transfers to help the provinces eliminate child proverty, since Harper refuses to do so.

It seems amazing that Harper wants us all to forget Québec ... then again, so did Preston Manning. Because that province sets trends for the rest of us to follow, including more generous social benefits and child care; but I guess that's too "socialistic" for PMS.

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Mark said...

Quebec can simply raise its sales tax to make up for the difference.

Or, it could harmonize as NL, NB and NS did, saving the province millions every year in administrative overlap.

However, because of the dogmatic "autonomists" or whatever Quebec's governing class calls itself these days, they're incapable of making a very simple and pragmatic step towards working with th federal government.

They cascaded their tax for no other reason than steadfast refusal to eliminate duplication in favour of federal collection of provincial revenue. And it costs Quebecers millions.

BlastFurnace said...

As I noted above, Mark, Québec does harmonize its tax -- albeit in a different way. And true, they'd make life a lot easier if it was a straight-up tax as it is in NL, NB and NS. It is also my understanding that it's the provincial government in Québec that collects the GST and sends it to Ottawa -- unlike the other three where it's the feds that collect the provincial portion of the "harmonized tax."

That being said, you're right. If there was a single tax authority then a lot of duplication would be eliminated. The German solution is perfect: The income tax and the VAT are both pooled 40-40-20: 40 to the federal, 40 to the state government, 20 to the municipality (except for the cities of Berlin, Bremen and Hamburg which also are states -- there it's a straight-up 40-60 split).