A state of perfect disharmony

COYNE: You'd think provinces would not have to be bribed to act in their own interest

So the harmonization comedy continues. Scant weeks after the people of British Columbia, in a magnificent fit of self-destructive fury, voted to unharmonize their provincial sales tax from the now-misnamed Harmonized Sales Tax, word came that talks between Ottawa and Quebec on a plan to compensate the province for harmonizing its own tax were at an impasse.

You could tell the talks were at an impasse because the two sides put out a press release announcing the talks were going swimmingly. “HST and QST harmonization,” it read: “Discussions proceeding normally.” And so they were, if by “normally” you mean sailing past the Sept. 15 deadline for an agreement to which the federal Conservatives had pledged themselves in the recent election campaign. The most they would say now is that they hoped to have a deal by the end of the month.

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Mind you, it was always a mystery just what they had to talk about, the feds having already promised, publicly and often, to yield to Quebec’s demands. They’d even named the figure, $2.2 billion—by a remarkable coincidence, the very sum the Charest government had asked for at the start. What was there left to negotiate?

A bigger puzzle still was identifying precisely what Quebec was to be compensated for. The province, after all, was supposed to have harmonized its tax regime with the GST, as it was then known, in 1991. Far from costing the province money, the exercise of broadening the province’s sales tax to cover nearly every good and service was reckoned to have produced a net revenue gain, even after the cost of rebating businesses for the tax they paid on their inputs—the key change in transforming an ordinary retail sales tax into a GST-style “value-added” tax. It’s one thing to compensate a province for costs incurred. It’s quite another to compensate it in their absence.

The same might be said, for that matter, of the other members of the Harmony Six (Minus One): B.C. and Ontario, who harmonized last year, and Nova Scotia, New Brunswick and Newfoundland, who did the same in 1997. The “compensation” each was paid was mostly a bribe, to be used in turn to bribe their citizens into compliance. Which is fine, I suppose—you’d think provinces would not have to be bribed to do what is in their own interests, as every economist will tell you harmonization is, but after all this is Canada: we don’t do nothing just ’cause it makes sense. But if there’s a case for offering provinces an inducement to do something they would otherwise be reluctant to do, there would seem rather less case for offering a province an inducement to do something it already did 20 years ago.

Well there is a sort of a case. It’s the one Quebec made when it suddenly demanded to be reimbursed for the pains it had endured two decades before: simple fairness. Ontario, B.C. and the rest had been paid to secure their co-operation. So should it, even if the co-operation was secured long ago. A Quebec government position paper makes clear that the $2.2- billion figure was arrived at as a mathematical function of the $4.3 billion Ontario received. What could be more Canadian than that?

Except . . . Quebec didn’t fully harmonize its tax with the GST, certainly not to the degree the other provinces did. While it was the first—to its credit—and while it has moved some ways closer over the years, there remain several points of divergence. It never integrated its tax system with the feds’, for starters: they remain two separate regimes, with different names, even different registration numbers. Instead of Ottawa collecting the tax on the provinces’ behalf, as elsewhere, in Quebec it is the province that collects both taxes, then remits Ottawa its share.

There are differences in the bases to which the two taxes apply, as there are in other participating provinces: for example, Quebec zero-rates books, as Ontario does. But, significantly, Quebec also zero-rates financial institutions, a marked—and expensive—departure from the federal practice. Likewise, while some business expenses in Quebec are eligible for input tax refunds, many others are not.

A final distinction drives home the point: the QST applies on top of the federal tax. Not only do the two taxes apply to different bases, the federal tax is subsumed in the provincial base. The symbolism is clear, to the point of crudity.

What, then, are the two sides negotiating? Presumably—ideally—they are discussing a truer, deeper harmonization, in which Quebec would make commitments more nearly comparable to those of the other harmonized provinces. Perhaps, in that light, Quebec’s demand to be paid $2.2 billion for its past efforts at co-operation was in fact an offer to co-operate further in exchange for that sum.

It’s difficult to say if the price is right, however, until we see what, if anything, the two sides agree to. To be sure, Quebec has let it be known it would be willing to adopt the federal system’s treatment of financial institutions. But Ottawa has already conceded that Quebec will continue to collect the tax on its behalf. The safest forecast is for some sort of impenetrable fudge, leaving Canada, more than two decades after the GST was introduced, with at least four different federal-provincial sales tax regimes: harmonized, unharmonized, federal tax only (oh, there you are, Alberta)—and Quebec.

But stay tuned. Discussions proceeding normally.