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PST Hike Means Higher Taxes and Lower Prosperity for Manitoba Families

06/20/2013 10:53 EDT | Updated 08/20/2013 05:12 EDT

When Manitoba's NDP government delivered its budget back in April, Finance Minister Stan Struthers ruffled some feathers with his announcement of an increase in the provincial sales tax (PST) to eight per cent from seven per cent, effective July 1, which happens to be Canada Day. His proposed tax hike has been hotly debated ever since.

Despite strong pushback from Manitobans, Struthers seems poised to proceed with the higher PST. This spells trouble on two fronts. First, the PST hike will increase the amount of taxes Manitoba families pay. And second, it will further diminish their prospects for jobs and income growth.

Let's start with the impact of hiking the PST on the average family's total tax bill. In 2013, we estimate that an average Manitoba family with two or more people will pay a total of $38,851 in federal, provincial, and local government taxes. That works out to 42.6 per cent of their annual income.

If this seems like a lot of taxes, it's because Manitobans pay a host of taxes in addition to what's deducted off their pay cheques. The total tax bill for a typical Manitoba family includes visible taxes like income taxes, sales taxes, payroll taxes, and property taxes as well as hidden taxes like profit taxes, gas taxes, import duties--and the list goes on.

According to our calculations, the PST rate hike alone will increase the average family's total tax bill this year by $437 -- and that's just with the higher rate for six months of the year.

But the pain of the PST hike for Manitoba families doesn't end there; they will also endure a reduction in jobs and income growth.

Here's why: The provincial sales tax applies not only to items bought at the register, but also to the cost of doing business. That includes capital goods (machinery, equipment, and new technologies), materials, energy, and other goods or services that entrepreneurs purchase and use to produce what they sell to their customers.

The higher cost of capital goods is by far the most detrimental feature of the PST, since investments in machinery, equipment, and technology are the foundation of a stronger and more productive economy. A higher PST rate will further increase the cost of doing business, leaving entrepreneurs with less money to operate, expand, innovate, hire people, and pay higher wages.

Partly due to the provincial sales tax, Manitoba had Canada's second highest overall tax rate on new investment in 2012 at 26.3 per cent. For perspective, the comparable rate was 16.2 per cent in Alberta and 17.9 per cent in neighbouring Ontario.

In a world where provinces compete for mobile investment dollars, increasing the PST will make it even more expensive to invest and do business in Manitoba. By deterring investment, Manitoba families ultimately lose because less investment means reduced job creation and income growth.

Fortunately, there is a better alternative to the PST.

All other provinces, except British Columbia and Saskatchewan, have already moved to a harmonized sales tax (HST); Alberta has no provincial sales tax. The HST, like the federal goods and services tax (GST), is a "value-added" sales tax in that it only applies to the final consumption of a broad basket of goods and services.

Struthers should consider following suit. Past experience in other provinces shows that moving to the HST leads to a material uptick in the overall level of investment. The investment boost results from a lower cost of doing business, since things like capital goods are exempt from the HST.

In his April budget speech, Struthers said "[increasing the PST] will enhance productivity and innovation, and create good jobs in the short term--and the long term." In reality, it will do nothing of the sort. A higher PST rate will, however, increase the average family's total tax bill and decrease their future prosperity.

If Struthers really wants to increase jobs and productivity, he should change course and consider other options like a harmonized sales tax.

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This commentary was co-written by Milagros Palacios, Fraser Institute economist and co-author of Canadians Celebrate Tax Freedom Day on June 10, 2013.