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One other quick point. I suppose the term "regionally variable tax rates" would be a better political seller than "geographically discriminatory tax rates". In politics, language is everything!

Too bad there isn't an existing local tax system the province has total discretion over that could raise these revenues...something that could capture the additional value created by the infrastructure upgrades...

The practical considerations around implementing differential regional HST rates within Ontario would be significant. At the simplest level, the place of supply rules in the GST/HST system - the rules governing whether the supplier should charge the 5% GST, the 13% Ontario HST or the 15 Nova Scotia HST, for example - are largely based on legal jurisdiction (Is the address of the recipient of the service in Ontario? Are the goods delivered in Ontario? Can the intellectual property only be used in Ontario?). Without a clearly defined and obvious boundary (i.e., one that will be obvious to a supplier in, say, Saskatoon or Charlottown who knows nothing about Ontario's geography or the location of its various municipalities and towns), that system breaks down.

Legally, I suppose Ontario could do what Quebec does, and just introduce their own "provincial" HST, that is in substantce, harmonized with the federal GST/HST, but is collected and administered by the provincial government. Still, Quebec only does it because they allow nationalism to override common sense, and I can't see it being viable for a 1% tax.

Still, I was a little surprised to see Flaherty so quick out of the gate to shut down that particular Metrolink trial balloon and seemingly to oppose it on political grounds (i.e., Ontarians over already over-taxed - which, while true, is the provincial government's cross to bear) rather than on the more mundane basis that it's unworkable and that Metrolink should focus more on keeping trains running than on ill-conceived tax proposals. I suppose the feds have enough problems on their hands and just wanted to strangle that particular proposal before it got any air.

This raises the age old question in Canada about inter-regional transfers. As a GTHA resident, I would be happy to see regional taxes remain within the regions of Ontario, and don't think that would disadvantage the region I am in.

It is also interesting to see a particular tax being attached to a particular expense, without using some kind of demand/user fee aspect. Why use a general sales tax to fund a particular expense of government? Why not congestion/tolls/gas/user fees? That would seem to me to be more efficient. You get some demand management tools, and there would presumably be better management/use of the scarce road/transit tools. It is also relatively easy to deal with the equity aspects by using some income transfers to offset some expenses for low income people.

On another note, I wouldn't be surprised if, even with all of a 1% rise in overall sales tax in the Province going to GTHA transit (which would never actually happen - the regions would each get a part of the sales tax as infrastructure funding - but just suppose), that there would still be transfers of taxes from the GTHA area to northern/rural Ontario.

"Why use a general sales tax to fund a particular expense of government? Why not congestion/tolls/gas/user fees? That would seem to me to be more efficient."

Well, with respect to congestion fees/tolls roads, the HST had the advantage of having an existing collection infrastructure (and the marginal cost of collecting the additional tax is probably close to zero). That doesn't achieve the efficiency goals of user fee, but it probably raises considerably more net revenue which, since the proposal is to fund various transit projects, probably makes it more attractive.

As for the choice of raising the HST by 1% or raising the equivalent funds through a higher gas tax, I suspect it comes down to politics. A 1% HST increase is probably less likely to get the government of the day lynched than an increase in the gas tax that would raise equivalent revenue (for whatever reason, gas prices are politically sensitive in a way that the price of other goods are not). That may not mean much, since as you suggest, either proposal will likely go over like a lead balloon. I guess the other reason is that they don't want to tax businesses (who can recover HST through input tax credits). You can argument the (lack of) economic merits for both of those reasons, but politically, they're bulletproof.

One thing to note is that PEI currently has their own distinct rate of 14% HST. Now PEI is its own province but on the other hand the GTA is what nine, ten, eleven, times the size of PEI. So having the GTA pay 14% HST the same rate as PEI on the surface doesn't seem like a big deal. However, the issue is how revenues get divvied up from Ottawa under the CITCA agreements. Right now they are based on a the provinces share of national consumption calculated by Stats Can. Stats Can would have to have certain consumption data on just the GTA which I am not sure they do.

It is interesting this idea of regional HST's has been thrown around for a while especially in Alberta of all places(as an alternative basically to a province wide HST). This though seems like the first time the Feds have unequivocally poured cold water on the idea.

"So having the GTA pay 14% HST the same rate as PEI on the surface doesn't seem like a big deal."

The problem isn't the differential rate, since as you note, we already have different GST/HST rates accross Canada (5% in GST provinces, 13% in HST provinces except PEI, 14% in PEI). The problem is that PEI (or Nova Scotia, or Alberta, etc.) is a well-defined and understood geograhical area, the GTA is not.

Think of it at the most basic level, if you're a lawyer sending a bill to a client, you generally have to charge GST/HST on your services based on the location of your client. If I send the bill to PEI, I charge 14% HST. I know the client is in PEI (at least for HST purposes) because it says so in their mailing address.

Now, let's imagine you have a special HST rate for the greater Toronto Area of, say, 14%. If I send a bill to a client in Whitby (or any other suburb of Toronto), do I charge 13% HST or 14%? What about if my client lists his address in Etobicoke or East York (as people still do), do I then have to bill the 14% GTA rate? That isn't so clear. A supplier from Vancouver or Quebec can't be expected to know that Whitby is part of the GTA or that Etobicoke or East York are parts of Toronto.

Now, I suppose one could do it on the basis of municipalities, so you charge a different rate to people living in Toronto, Peel and Durham, which at least are well defined regions. But, the reality is, no one puts "Durham" in their mailing address, they put "Ajax", "Whitby", "Port Perry", "Oshawa", "Myrtle", "Clarington" (heck, I live in Whitby, but that's not the name in my mailing address). So, if you're going to use municipality to identify which people are part of the GTA, you basically need a laundry list of every municipal identity (including some that are no longer recognized, like East York or Etobicoke) in the GTA that people might put in their mailing address. And the lawyer (or any other supplier) sending out an invoice, in figuring out what tax rate to charge, will have to go through that laundry list of municipal identities to figure out if his client lives in the GTA or otherwise. Ditto for CRA auditors reviewing the tax compliance of those suppliers.

In short, that sort of system imposes an unworkable compliance burden on suppliers and CRA auditors (and certainly a compliance burden that isn't proportionate to the revenue bump from a 1% HST increase).

I think we also have a 15% rate in Nova Scotia too.

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