Proceedings of the Standing Senate Committee on
Banking, Trade and
Commerce
Issue 21 - Evidence - Afternoon sitting
ST. JOHN'S, Wednesday, March 5, 1997
The Standing Senate Committee on Banking, Trade and Commerce, to which was referred Bill C-70, to amend the Excise Tax Act, the Federal-Provincial Fiscal Arrangements Act, the Income Tax Act, the Debt Servicing and Reduction Account Act and related Acts, met this day at 2:00 p.m. to give consideration to the bill.
Senator Michael Kirby (Chairman) in the Chair.
[English]
The Chairman: Senators, I understand representatives from the Newfoundland and Labrador Pensioners and Senior Citizens Association are on their way and they will join us when we begin.
Our witnesses for the first session this afternoon are from the Newfoundland and Labrador Federation of Labour, Ms Corinne Budgell; from the Coalition for Equality, Mr. Martin Saunders and Ms Bev Brown; and from Survive, Mr. Des McGrath.
Mr. Des McGrath, Founding Member, Survive: We feel as a group that the proposed harmonization legislation is not only unconstitutional but will threaten the very socio-economic survival of Newfoundland. We feel that the legislation in question is purely a federal value-added tax and that the province is getting a kickback of 8 per cent plus a one-time cash infusion of several hundred million dollars as a political payoff for allowing the federal government to enlarge its taxation jurisdiction.
We base this premise on the October 3, 1950, Supreme Court ruling which looked at the income taxation rental scheme which was implemented in the 1940s. That case involved the Lord Nelson Hotel and the Attorney General of Nova Scotia. That province was implementing a tax which, at that point in time, the Lord Nelson Hotel determined to be unconstitutional and they challenged it all the way to the Supreme Court of Canada. The court found that the inter-delegation between the national and provincial legislatures would have the effect of altering the basic scheme of Canadian federalism, and neither Parliament nor the legislatures were authorized under the British North America Act to make what, in the court's opinion, would be tantamount to ad hoc amendments to the division of legislative powers. In reaching this conclusion, the Supreme Court pledged its allegiance to the watertight compartments' approach of the division of powers in sections the 91 and 92, and they established an unbreachable barrier between the powers assigned exclusively to each level of government.
Chief Justice Renfert, in his summation said that the Parliament of Canada and the legislatures of the provinces were within their sphere defined by the British North America Act and none of them had the unlimited capacity of an individual. He said that they could exercise only the legislative powers respectively given them by sections 91 and 92 of the act and those powers had to be found in either of those sections. He said that the constitution does not belong to the Parliament or the legislatures, it belongs to the country, and it is there that the citizens of the country will find the protection of the rights for which they are entitled. He went on to say that it is part of that protection that Parliament can legislate only on subject matters referred to it by section 91 and that the province can legislate exclusively -- and the key word is `exclusively' -- on the subject matters referred to it in section 92. He found that no power of delegation was expressed in section 91 or in section 92, nor, indeed, was there found any power of accepting delegation from one body to the other. He said that, under the scheme of the British North America Act, they are watertight compartments and that they are the essential part of the original structure.
One of those essential parts is the power of direct taxation. We have had provincial sales tax in this province since we joined in 1949 and I believe that it is unconstitutional for our province to surrender to Ottawa $570 million of revenue a year that we can use for our own purposes within this province.
Ms Corinne Budgell, First Vice-President, Newfoundland and Labrador Federation of Labour: The Newfoundland and Labrador Federation of Labour represents about 50,000 working men and women and their families in this province. We have over 30 affiliated unions making up our membership, along with five district labour councils.
Some of the various industries we represent in this province that employ our members include fishing, mining, forestry, shipbuilding, construction, retail, hospitality and public services.
The introduction of the harmonized sales tax will increase the current inequity in the present unfair tax system and will impede economic growth in our economy. With the introduction of this new regressive tax, those people with meagre income levels will be left bearing the tax burden of a broader tax base without being able to reap the benefits of a lower rate.
The price effect of the harmonized sales tax affects those with low incomes disproportionately, since the basic necessities of life will cost more, and we object to this. According to the Atlantic Provinces Economic Council, APEC, in 1997 in the Province of Newfoundland and Labrador the price of clothing will increase by 1.1 per cent, energy and fuel prices will go up by 5.5 per cent, while the cost of personal, legal and financial services will increase by 4.2 per cent.
In a climate such as ours in this province, fuel for heating and hot water is a vital part of living. The biggest increase in cost is for fuel and energy, and this will hit low-income families hard, particularly, once again, single-parent families, especially women. In a labour market where women's work is largely undervalued and "ghetto-ized", and taking into account their overall economic dependence, any increase in the cost of basic necessities will affect them disproportionately. Further, the 4.2-per-cent increase in legal services will make it even more difficult for women to access legal advice when they are forced to leave an abusive relationship, decreasing the probability of any degree of economic independence from their abusive partner and increasing the likelihood of them falling into poverty along with their children.
In contrast, those items which are purchased with discretionary income will cost much less and will benefit only higher-income families. The price of new and used motor vehicles will go down by 2.9 per cent, recreation and entertainment will be cheaper by 3.2 per cent, and the cost of eating in restaurants and staying in hotels will be 3 per cent lower. That makes it clear that the workings of the harmonization sales tax is to the great benefit of the well off in our society and will have the ultimate effect of again increasing the gap between the rich and the poor.
Moreover, any shift towards a consumer-based tax will depress overall consumer spending and will have a negative effect on the economy. The introduction of the GST in 1991 was followed by two years of poor economic performance in most of Atlantic Canada, and consumption sectors since then have been flat. Consumption taxes form a much larger portion of provincial own-source revenue in Atlantic Canada, about one-third of own-source revenues compared with an average of about 20 per cent for Canada as a whole.
Provincial revenues will fall since the new 15-per-cent rate, even levied on a broader tax base, will not raise as much as the higher combined GST and PST rate on a smaller tax base. The federal government has committed to almost $1 billion in grants to three Atlantic provinces over the next four years to make up for the estimated shortfall. We object to this money being used to, in effect, subsidize tax breaks to businesses while ordinary Canadians must pay higher prices for everyday staples, at a time when we are being told that government cannot afford to maintain strong social programs. Having little confidence in the deficit budget approach of both the government and our provincial government Liberals, we would also like to know how our economy will survive when the four years is up and the federal grants run out. Our estimation is that a much higher tax base will be imposed.
What is clear is that business will benefit greatly from harmonization because they will no longer pay provincial sales tax on any purchases in the shift in the tax burden to domestic consumers. In Newfoundland and Labrador $207.8 million was paid by businesses in 1992 in taxes. The administrative costs of doing business will be lower and, since it is unlikely that these savings will be passed along to the consumer, profits will be higher. According to APEC, the harmonized sales tax savings will be a business-to-business pass-through, and not a business-to-consumer pass-through.
It may well be that the harmonized sales tax makes the sales element of the current tax system more efficient and secures the existing tax base, but it does nothing to improve the overall "progressivity" of any tax system. Harmonization benefits the well-to-do and business and hits low income families and marginalized groups in our society. The Newfoundland and Labrador Federation of Labour, along with the labour movement throughout Canada, social justice and community groups, have advocated for some time a more progressive and a fairer tax system in general. Unfortunately, our proposals for wealth taxes and for progressive change to the corporate and personal income tax systems to maintain a strong tax base have consistently been ignored by the federal government.
We urge you, the committee, to reject Bill C-70 on the grounds outlined in our brief, and to recommend a comprehensive review of the existing tax system with a view to changing it to a much fairer and more progressive tax structure.
Ms Bev Brown, Member, Coalition for Equality and National Anti-Poverty Organization: Last week Senator Erminie Cohen, your colleague, released a comprehensive, well-researched report that shows the growing gap between the rich and the poor in Canada, and I thank her for that work. She told us that in 1994 the richest quintile of Canadians had almost half the income in Canada, while the poorest quintile had only 3.4 per cent of all income.
With the deep cuts to social programs the Canadian government continues to implement, the bottom quintile of Canadians who live here in Newfoundland and Labrador have been facing cut after cut as federal transfers are reduced to our province. Because our fishery was mismanaged and stocks declined, there are no jobs for tens of thousands of Newfoundlanders. Because many people in Newfoundland work in seasonal resource jobs, the new Employment Insurance restrictions punish them in particular for having had seasonal labour.
The Atlantic Groundfish Strategy, TAGS, was created to address the issue of workers who lost their jobs and way of life here because cod were mismanaged and disappeared. Recipients are being dropped from the TAGS program at the rate of about 300 people a month, and the program itself will end in 1998. These people are being left to cope with finding work in an area where jobs are as scarce as fish.
Now Newfoundlanders are facing a new consumption tax which will hurt low-income people, but our finance minister, who is appearing before you at 3:45, claims, "...the vast majority of families in all income categories will pay less tax." This is only true if you have discretionary income to spend, unlike people who live on low, fixed incomes, such as pensioners, people forced to take social assistance and people with low paying jobs or on Employment Insurance. These people will all be hurt by the harmonized sales tax because we do not buy many items that will have reduced taxes, such as vehicles, recreation, or hotel rooms. The new 8-per-cent tax on heating fuels -- and the price of oil just went up -- electricity, purchased transport, gasoline and children's clothing is a huge increase for people who live on low, fixed incomes to pay. It is extremely unfair to implement this tax that will push the poorest people in our province into deeper poverty.
There are no plans to give rebates to low-income Newfoundlanders who will suffer from the increased heating costs, although we live in the poorest of the three participating provinces. The province will also lose $72 million in tax revenue after the proposed equalization payments end in four years.
Consumption taxes hit poor people the hardest. As a person who is facing this huge new expense myself, I ask you to stop this robbery from the poor to increase revenues for business. Senator Cohen's report shows conclusively that government policies have been working against the people with the lowest incomes in this country. She asks why we are systematically destroying our income redistribution system. The harmonized sales tax favours high-income earners and makes life less fair for low-income Canadians.
I ask you, as senators, to effectively address this proposed increased inequity when you report what you heard in the Atlantic provinces to the Government of Canada, and to stop this bill.
Mr. Martin Saunders, Member, Coalition for Equality: Harmonization makes the sales tax element of the current tax system more efficient and secures the existing tax base, but it does nothing to improve the overall tax system. Harmonization involves a modest shift in the tax burden from profits and foreign customers to consumers and puts the burden on the poor and the working poor again.
It seems that, since early the 1980s, all tax changes have been made to give business the tax breaks while dumping the burden on the backs of the working poor and the middle class. In the harmonization of the GST and the PST, we again see this happening. The people who will benefit the most are business by the system making it easier to administer because they will not be required to pay PST.
The savings from the HST will be passed on from business to business. It will not be a business-to-consumer pass-through. Except for new housing and motor vehicles, consumers will benefit very little. However, if you look at the savings on a new vehicle and the proposed four-cents-per-litre increase in gasoline, you do not need to be an economist to realize that, by the time your car is paid off, your savings from the HST will be gone in gas tax.
The consumers who will benefit will be those who have the higher incomes and can afford to buy the big items and take advantage of eating out in restaurants and hotels. The consumers are told to look at the savings of 4.84 per cent in Newfoundland, after combining the GST and PST, but what assurance do we have that this will stay at 15 per cent when government again feels we need a tax increase?
We are suggesting that Liberals live up to their promise to scrap the GST and bring in a more fair and progressive tax like the following: One, have a minimum corporate income tax; two, limit business meals and entertainment tax; three, take away the lobbyist expense deductions; four, tax excess profits on banks; five, set a fair tax on capital gains; six, income tax be deducted according to income with a reasonable base and that tax be based on the more you make the more you pay; and seven, put a limit on RRSP tax breaks for the wealthy.
We do not believe that consumers will benefit because the savings to business sectors will not be passed on to the consumer. It did not happen when the manufacturing tax was replaced by the GST, and we do not believe it will happen with this change either. Therefore, we ask you to give your support to these recommendations when making your report.
Senator Angus: I would like to address a couple of questions to you, Mr. McGrath, if I may. You presented a very learned brief on the constitutional law issue. Could you tell us more about your group, Survive?
Mr. McGrath: We started with the closure of lighthouses and the introduction of automatic weather observation systems. We realized that, under the guise of cost cutting measures, we had a federal bureaucracy which was running amuck and taking pot shots at whoever they thought was fair game. Lighthouse keepers appeared to be fair game, so we took up their cause, and we continue to support their cause.
We started looking at it as a more fundamental issue, and that is the survival of rural Newfoundland and Labrador. We believe that the only political entity that can maintain its survival is a political entity that has control over its own revenue sources. We believe that, for the Province of Newfoundland and Labrador to surrender $570 million a year worth of provincial taxation revenue to an agency of the federal government is surrendering the political sovereignty of this province.
From that basis, we think that every bit of money that comes back will have strings attached and that Newfoundland and Labrador will just be a cracky dog in the backyard of Canadian federalism, and every now and then we will thrown a bone to keep us happy.
I believe that people like myself, who have spent the last 20 years wanting to take part in a brighter future for this province, will need to leave the province because there will be no opportunity here, and everything that is being done from a federal level down to a provincial level is resulting in the the depopulation and ethnic cleansing of rural Newfoundland through socio-economic policy.
Senator Angus: I get the picture. Insofar as the relinquishing of or taking away certain of the sovereignty of Newfoundland and Labrador, I understand your position to be that it is in the watertight compartments, the exclusive jurisdiction in direct taxation that is being abrogated or abdicated by the three Atlantic provinces in question. Is that right?
Mr. McGrath: That is right. If you look back at certain cases, particularly Lamb v. the Toronto Dominion Bank of 1887, the Privy Council looked at the division of powers with respect to direct and indirect taxation. They assumed that the province was given the exclusive jurisdiction over direct taxation for the purposes of raising revenues for provincial purposes. If you look at the preamble and the "post-amble" of section 91, and the preamble and "post-amble" of section 92 of the Canadian Constitution, the provinces are given exclusive rights.
When this country was founded, it was founded on the basis that we would be equal partners in confederation but that certain rights were surrendered to a federal entity. One of those rights was indirect taxation or, normally, customs and excise duties. We are now in a situation with regard to the provincial sales tax -- and the province calls it a "direct" tax, in fact, the legislation calls it a "direct" tax -- where the province is conspiring with the federal Liberals to merge this into a common, direct tax which will be administered by the federal government. It is clearly unconstitutional.
If you look at the Supreme Court decisions by seven chief justices of the Supreme Court on October 3, 1950, you will realize that the province and the federal government have no constitutional right to "inter-delegate" power. In fact, there are many politicians today who seem to believe that, in our patriated constitution of 1982, there was some change whereby the federal government had broad sweeping powers of taxation. However, the Constitution Act, 1982 states:
Whereas Canada is founded upon principles that recognize the supremacy of God and the rule of law:
Nothing in this Charter extends the legislative powers of any body or authority.
Furthermore, section 52 states:
(1) The Constitution of Canada is the supreme law of Canada, and any law that is inconsistent with the provisions of the Constitution is, to the extent of the inconsistency, of no force or effect.
In my opinion the Senate has no other recourse but to effectively stall this legislation or send it back.
Sir Robert Bond, one of Newfoundland's famous Prime Ministers, said that he could conceive of no greater political crime than the betrayal of the people's confidence and trust, and that he knew of no greater reward that a public man can receive than the approval of his own conscience and the "well done" from those who had confided their interests into the politician's keeping. We, today, are confiding our interests in your keeping.
Senator Angus: That is very well put, sir. I understand your position then also to be that the watertight compartments, referred to in the jurisprudence you quoted earlier, are in effect being breached, or broached, by not only the three provincial statutes which have been legislated, but also by Bill C-70 that we are examining in this committee; is that correct?
Mr. McGrath: Yes, that is certainly the case. You must look at the concept of Canadian federalism. The provinces are given exclusive powers. Woodrow Wilson, who was the professor of jurisprudence at Princeton University before he became President of the United States, said it very succinctly. He said that the Constitution of Canada is the opposite of the Constitution of the United States. He said that in Canada all of the specified powers are given to the provinces and the residue falls with the federal government, whereas, in the United States all of the specified powers are with the federal government and the residue is with the states.
I feel that this harmonization is another step down the road of GATT, NAFTA and the World Trade Organization, to basically make Canada a province of an international agency and subjugate the true provinces, or the true dominions of Canada, to a merely boundary, superficial role.
Senator Angus: You may be interested, sir, to know I am graduate of Woodrow Wilson School at Princeton University, so I can relate to what you are saying.
I want to make it absolutely clear that my question is on Bill C-70. Your submission is that Bill C-70, to the extent that it takes away the provincial exclusivity in this area of taxation, is, on its face, unconstitutional?
Mr. McGrath: Exactly. That must be addressed.
Senator Buchanan: As a signatory to the 1982 agreement with the other premiers and Mr. Trudeau, I can assure you that the taxing powers were not changed in the Constitution Act of 1982.
Senator Losier-Cool: I know that groups like yours encourage their representatives to speak out on their behalf. You did an excellent job.
My first is to you, Mr. McGrath, and to Madam Budgell, who represents the Newfoundland and Labrador Federation of Labour. Are you against both the HST and the GST; and do you want the whole tax structure reviewed?
Mr. McGrath: Yes. However, there are several other issues to be considered. On an equality basis, if you harmonize the tax in Newfoundland and a person in Newfoundland wants to import something from another country, that person will pay 15-per-cent tax as will a citizen in Nova Scotia. However, a citizen of Alberta, for example, will only be required to pay a 7-per-cent tax. You are talking about a 15-per-cent tax in Newfoundland and 7 per cent tax in Alberta.
That is another aspect of unconstitutionality. It is shifting the taxation burden onto the individual citizens and consumers of this country and it is taking a negative view or complete non-taxation approach to foreign goods and services that are coming into this country from suppliers like Communist China, where they have prison camps and slave labour, and they can compete more effectively on the global market.
If we are to consider some sort of taxation reform in this country, the federal government must start assessing free trade because free trade is not entirely free. We may have to impose some punitive sanctions on countries that whip their people into submission to produce goods at a lower price.
Senator Losier-Cool: That is a very interesting concept, but perhaps it may be a more appropriate subject for another study, rather than our study of Bill C-70.
You mentioned the APEC report which states that harmonization would stimulate consumer spending which will result in an improved economy. The report also states that Newfoundland and Labrador will be the province that will benefit the most from HST. Would you agree with that; or are you aware of it?
Ms Budgell: Yes, I am aware of that finding, but I would absolutely disagree with it. Currently, the tax rate in Newfoundland, with the combined GST and retail sales tax, is almost 20 per cent. However, that applies to a smaller number of goods. The harmonized sales tax will have a much broader base. It will apply to electricity, fuel, children's clothing, and all types of services that people absolutely must purchase. You will be attacking the poor. You are also talking about a reduction in the cost of many discretionary items that people just will not purchase. This will not stimulate the economy. The only thing it will do is take more money out of the pockets of the working poor and people who are unemployed in this province to pay for services, basic essentials. These people have no money left for any type of discretionary spending.
It has been recognized by the provincial and federal governments that, in four years from now, there will be another major loss in the tax base of this province. That is why the federal government is dumping an enormous amount of money into this province. It is, in fact, a kickback to the province. This certainly will not stimulate the economy in such a way that people will be able to buy goods and services, especially services that are now being subjected to a 15-per-cent tax versus the previous 7 per cent.
Senator Losier-Cool: Is it the position of your members that you are against any kind of HST?
Ms Budgell: Yes.
Senator Losier-Cool: How many members do you represent?
Ms Budgell: We represent 50,000 working men and women in this province and, by extension, their families. The members who work in this province, are unionized members.
Senator Losier-Cool: Usually unionized members want job creation and, according to page 3 of this report, this measure could create more jobs.
Ms Budgell: The possibility in Newfoundland for anything like that creating jobs is very limited. There are very few jobs in this province and consumer spending will not be stimulated by this tax, which in fact will not lead to a creation of jobs.
Senator Losier-Cool: We had a group this morning who said the opposite.
Yesterday in New Brunswick we were told that the provincial government has announced a child supplement. Will there will be a child tax benefit in Newfoundland?
Since your budget has not yet been announced, you probably do not know if that is planned.
Mr. Saunders: That is right.
Senator Losier-Cool: That will be a question for the finance minister this afternoon.
I am sure you are aware that Statistics Canada has said that, with the implementation of the HST, there will be a net saving for low-income families of, on average, $255 annually.
Ms Brown: We are saying that poor people, those in the bottom quintile, do not buy discretionary items but they must purchase food, electricity, pay the telephone bill and sometimes buy children's clothes which will also be taxed now.
Whatever Statistics Canada says, there are a large portion of people in Canada, who will not be able to make those savings.
The Chairman: Picking up on a point that Senator Losier-Cool has just made, in their provincial budgets, both Nova Scotia and New Brunswick have introduced programs that are designed, at least in part, to deal with the low-income problems that you, Ms Brown, Mr. Saunders and Ms Budgell, have outlined. In Nova Scotia they did it through two programs, one being an income tax reduction program and the other being a direct assistance program aimed at people who in fact do not benefit from reduced taxes because they do not pay taxes. New Brunswick has a $25 million program which is aimed largely at single-parent families with children and is, in part, a working income supplement.
My question is, and I realize the provincial budget has not yet come down in Newfoundland so you probably do not know the answer, but I do not know of any corresponding types of programs that have thus far been announced in Newfoundland. Does anybody know what has either happened or is rumoured will happen?
Ms Budgell: You are correct, absolutely nothing has happened. The provincial budget is to be announced on March 20. The Minister of Finance for the province will be here. I imagine he is in a much better position than anyone to answer any questions, but there has been no rumours about any sort of tax break for working poor people to make up for the introduction of the HST and any financial impact that may have.
That still does not go to the root of the problem. That would only be a minor, quick fix. It still does not deal with Canada's very poor tax program and how it treats the poor, and how corporations, the banks and rich people are not taxed. Since the 1970s, the wealth of this country has been redistributed drastically with more going to the rich and the poor are getting poorer. These quick-fix programs do not workIf someone who is receiving social assistance is $50 better off under that type of program, then the departments of social assistance will find a way to take that back from him anyway.
The Chairman: I do not dispute your larger question. What I was trying to understand was whether any remedial action had been announced by the Government of Newfoundland?
Ms Budgell: No. The only announcement by the Government of Newfoundland has been about the tax break that has been contemplated for poor families, and the Department of Social Services is saying they will find a way to get that money back to the provincial government.
Mr. Saunders: If there are any tax breaks in Newfoundland, especially for those on social assistance, it is usually taken back. If I work for three or four months this year and then go on social assistance, at the end of the year any tax rebate is taken away from me. I am not allowed to have that. That has been the policy of this government here.
Mr. Martin has introduced some tax breaks. Instead of giving money to the people, they are introducing programs. They say that poor people cannot handle money. They think we go out and spend our money on booze and playing bingo and whatever, and because of that it should not be given to us. That is the policy here, and that is the way it has been.
The Chairman: I am not disputing what you say because I honestly do not know. I am a bit surprised to hear you say that because, in the back of my mind I recall that some 10 or 15 years ago the federal government amended a social assistance program and there was a debate as to whether provinces would actually let it flow through or whether they would siphon off a piece of it. I thought that issue had been resolved, and that it was decided that that it would flow all the way through. I accept I may be wrong, that is my recollection of the situation.
Mr. Saunders: The NDP member in the House of Assembly raised that issue and I think the court ruled that they should not do it. However, they then introduced legislation that allowed them to do it anyway.
Ms Brown: That is also true for the new child tax credit.
Mr. McGrath: This is a very resource rich province and probably the most resource rich region of Canada, per capita. A serious problem I see with this harmonized sales tax relates to the Atlantic accord which guaranteed a certain amount of residual provincial sales tax from Hibernia and Terra Nova. I think that was negotiated down to a four per cent residual sales tax on all capital expenditures over the life of Hibernia. That amounts to $94 million worth of taxation revenue. Under the harmonized sales tax, all of these companies involved in resource-based exploration within the province will not be liable for paying provincial sales tax on all capital expenditures. With a project the size of Voisy Bay, Labrador, the amount of money that could accrue into provincial coffers from such a provincial sales tax would be enormous.
I feel that this province is on a slippery slope and that the leadership of this province is, basically, asleep at the wheel. Surrendering this to the federal government is a bad move. It creates an opportunity for companies to come in here and not pay any tax on capital expenditures. That is a horrendous miscalculation.
Senator Buchanan: Have you asked the Minister of Finance or the Premier of Newfoundland about a PST rebate? I am referring to the PST part of the HST as a rebate similar to the GST rebate to low-income families, seniors and those in that bracket?
Mr. Saunders: As I understand from what the premier said, they are considering that but I do not think it a decision has been made. I think many people are confused about whether they will get the GST back.
Senator Buchanan: I do not think there is any question, Mr. Chairman, that GST rebates will continue.
The Chairman: I have never heard any discussion to the effect that they would not.
Senator Buchanan: Nothing in this bill states that.
Mr. Saunders: When I was doing my research I found no mention of how the rebate would apply when it went to 15 per cent.
Senator Buchanan: Have your organizations made a request of the Minister of Finance and Premier Tobin that there be a rebate program for lower-income seniors and those who are eligible under the GST rebate program?
Ms Budgell: No, because we do not agree with the new tax program. We are not questioning the government about how they might apply a rebate because our position has been clearly that we do not approve of the tax.
Senator Buchanan: I suspect what you are saying is if you start making those requests it would appear that you have agreed with the new tax?
Ms Budgell: Yes, which we do not.
Senator Buchanan: Is the GST rebate taken into consideration by the province when they provide social assistance to families? I did not think it was.
The Chairman: Is your question: Is it counted as income?
Senator Buchanan: Yes.
The Chairman: I thought it did not.
Ms Budgell: As far as I know it does not.
Ms Brown: However, we constantly hear rumours that they are about to take it back.
Senator Buchanan: It has not happened.
Ms Brown: Not yet. Social assistance claws back federal income tax rebates but not the GST.
Senator Buchanan: I do not think they claw back the GST.
Ms Brown: No, they do not.
Senator Buchanan: If this bill is passed, if you did request a PST rebate in the same way as the GST is rebated, then it would be up to the province to decide if they want to include it in income in the calculation of social assistance.
Ms Brown: We are hoping you will block the bill before then.
Mr. Saunders: Another point that was not mentioned is that, if this bill is passed, a stamp for a letter to somewhere in B.C. or Alberta will cost us 52 cents.
Senator Buchanan: I have a friend who uses a lot of stamps. He will buy them in P.E.I. and have them shipped over 50 books at a time.
Ms Budgell: Another point I would mention is that some mail-order companies will no longer be doing business here because of this tax. Lee Valley Tools, for example, a company in Ontario, has already announced that, as of April 1 they will not be doing business in Newfoundland. Rural Newfoundlanders depend on catalogue services for almost everything they purchase, and now many of the businesses they deal with will no longer be available to them because of this tax.
The Chairman: Senators, our next witness is Mr. Loyola Sullivan, the MHA from Ferryland. He is also the Leader of the Opposition and the Leader of the Progressive Conservative Party in Newfoundland.
Mr. Sullivan, thank you for your seven-page brief. However, since we would like to ask you a lot of questions, could you summarize the brief?
Senator Rompkey: On a point of order before Mr. Sullivan begins. Our agenda today lists Loyola Sullivan, Leader of the Opposition, Government of Newfoundland. Of course that should be the Government of Newfoundland and Labrador. I just want to correct the Senate records.
The Chairman: Mr. Sullivan, you may proceed with your opening statement and then we would be delighted to ask you some questions.
Mr. Loyola Sullivan, MHA, Ferryland, Leader of the Opposition, Newfoundland and Labrador: It is my pleasure to be here to make this presentation. I will try to shorten my official presentation as much as possible. It would probably take 12 to 15 minutes to read in its entirety.
The Chairman: That is fine. I wanted to make sure that we had lots of time to ask you questions.
Mr. Sullivan: The official opposition believes this harmonized tax agreement that is entered into with the three Atlantic provinces and the federal government should be abolished. The deal involves only three of the ten provinces in Canada and, with such a small tax base and a small number of people participating, the benefits from harmonization will be outweighed by many negatives.
There will be chaos in the sales tax policy across the country. That is one of the reasons why the national retail chains have told the federal government that the HST will result in severe problems for them and many must consider closing stores or pulling out of Atlantic Canada all together.
How can we introduce a measure like this in a province like Newfoundland and Labrador which is constantly fighting to keep businesses here? We are carrying on a very aggressive campaign to do so. There is no indication that any other province in this country will come into this agreement in the short term, and without all provinces signing on, such a deal should not even be considered.
Why would the federal government want to push this deal? Has anyone noticed that the three premiers who have agreed to sign this deal are the only three who happen to be of the same political stripe as the Prime Minister?
The Chairman: May I say that a number of my colleagues on my right have insisted on pointing that out to me with considerable regularity.
Mr. Sullivan: It seems I am certainly not alone in that observation.
I would also like to address the suddenness of this particular deal. In fact, the harmonized sales tax in our province came out of nowhere. On February 22, 1996, we went through a provincial election campaign during which no reference whatsoever was made to harmonization. Just 60 days later on April 23, the signing of a memorandum of understanding on this harmonized deal was announced. It was more than a simple agreement in principle; it was a detailed agreement laying out certain specifics on harmonization. Where did it come from? Why was nothing said about it by our province beforehand? Why was there no public consultation whatsoever; and why the rush?
We are also very concerned with the speed by which our government pushed the legislation through the House of Assembly. Not only did they decline to send it to a legislative committee, which is normally done with important pieces of legislation, they used a special and very heavy-handed parliamentary tactic to ensure the bill went through our legislature.
After just two days of debate on the bill on second reading, they gave notice that they would invoke closure. They moved closure on the debate the very next day, December 17. Then, on December 19 they invoked closure at the committee stage, forcing passage of the bill on that same day.
We firmly believe there is something underhanded on the timing of this deal, and the political reality is that the federal government's weakness heading into an election is its promise to abolish the GST. The only provinces to agree with this GST-hiding, harmonized sales tax deal, are the three provinces that are currently represented by liberal premiers.
We suspect that our premier would be very understanding because he has just left the federal caucus and he was one of the key people who shouted during 1993 that they would abolish the GST.
Coupled with the suddenness of this particular deal, many businesses in this province are finding themselves in grave difficulties because we are experiencing a severe economic downturn. That has been made worse by the fisheries moratorium. We have the phase out of the TAGS compensation program; there are cuts to EI and social assistance which many people in this province are now depending upon; and there is declining employment within our public service.
Businesses do not have the luxury of absorbing the transition costs when they are operating on the brink of bankruptcy.
The Retail Council of Canada estimates the costs to converting to the new tax system will exceed any savings from harmonization.
Most businesses cannot absorb those costs without increasing prices or laying off their employees, and businesses have good reason to be fearful of the impact at this time of converting their registers and accounting practices to a new system.
Tax-inclusive pricing has raised tremendous concern with businesses and business groups alike. The Saint John's Board of Trade has expressed its belief that tax-inclusive pricing would cause further economic trouble for tourism retailers by resulting in unnaturally elevated prices.
The first-glance shock to consumers would discourage buying. The government's attempt to help allay concerns about this have been very weak. In fact, its suggestions for reducing confusion has resulted in adding to the existing confusion. For example, government has suggested that business display the tax on signs nearby or add an additional tag with the free tax price. For any consumer looking at signs and tags containing different prices, it is inevitable that confusion to the consumer will be extreme.
How will they be able to compare prices? How will they know if they are getting a deal? Confusion will deter spending and during presentations to the House of Commons Finance Committee hearings on the Excise Tax Act, numerous representatives from a wide range of retailers detailed concerns regarding the tax-inclusive pricing and the negative effects that it would have, not only on consumers but on their respective companies.
Who will this new tax scheme hurt? The poor who spend a greater percentage of their income on essentials, essentials that would no longer be tax exempt, such as heating fuel, electricity, children's clothing, hair cuts, legal and other professional fees. The tax rate on basic necessities would more than double from the 7 per cent now to 15 per cent here in our province.
Over the course of a year, the impact of this cost increase will be blatantly noticeable, and for the tens of thousands of people in Newfoundland and Labrador who already have trouble making ends meet, to keep their children fed, clothed, keep them warm and healthy, it will indeed make a substantial difference.
The provincial finance minister has indicated that consumers need not worry, since they will make up the difference in big ticket items such as cars and fur coats. In reality, however, many people in this province cannot afford those big ticket items. Some 78,000 people in this province depend on social assistance to survive in a population only over 560,000.
Some 18,000 people, as well as their families, are now directly receiving TAGS benefits. Another 54,000 people and their families too, in many of these cases, are depending on employment insurance. In other words, there are more than 150,000 people -- over 200,000 when you consider the all family members -- in this province who have no disposable income except what they get from social assistance from TAGS and from EI.
In addition to that, there are thousands of seniors living on fixed incomes, thousands of students are trying to make ends meet on an inadequate student loan, of which harmonization will increase the cost -- Memorial University by $750,000 -- and the low-income families are going to be hard hit by this.
Those who, out of necessity, spend a greater portion of their incomes are the ones who will be hardest hit. Where is the justice in a policy that will reduce the tax on a fur coat and increase the tax on the children's clothing?
What about electricity and home heating fuels? Are these not basic necessities that consume a great portion of the disposable income of low-income families? Newfoundlanders and Labradorans fought tooth and nail last year against Newfoundland Power's proposal for a rate hike. We now know why the government itself paid a consumer advocate to help fight against Newfoundland Power's tax hike. The government wanted to step in and take a tax hike themselves, and with the tax on electricity now going from 7 per cent to 15 per cent, it is the government that will get the cash. That is intolerable.
When people have clearly stated that they do not want an increase in power or fuel costs, why is the government now turning around and increasing those costs? Why did the government not seek a tax exemption for certain necessities such as these?
Government is not seeking exemptions because it needs a broader tax base to cope with the decrease in tax revenue under the harmonized deal. Instead of having a relatively high total sales tax on some items, and relatively low on other items, our government has opted for an in-between rate on virtually all the goods and services. The in-between rate is at a level where this province will suffer a net loss of more than $150 million a year in revenue. That is assuming current spending levels.
Last year, the provincial government took in $565 million in retail sales tax. On the expanded GST base, the federal government takes from this province with, its 7-per-cent raise, in the vicinity of $279 million to $283 million a year. The 8 per cent our province will now get on that base will bring in about $320 million in revenue. That is a difference of $245 million shortfall because of the harmonized deal.
Our Minister of Finance has indicated that the government will introduce new tax measures for insurance, the private sale of vehicles, tobacco and sales tax, and he has indicated that those other revenue measures will bring in $90 million; thus leaving us $155 million short in revenue of what we are now receiving. That is far more than the $105 million the minister keeps telling us we are going to lose because of harmonization. How will our province adjust to this loss of revenue of $155 million?
The compensation package provided by Ottawa for the three provinces is not enough and it will run out very quickly; in fact after two years in our province. What then? Government has put the people in this province into a situation where it has reduced our tax base so there is less money for education, less money for health care and social programs, and it has raised its taxes on essential items like electricity and children's clothing. At the end of the day, if the economy does not rebound, where will the government get its revenues to run our essential services, our schools, and our hospitals?
Until now, our provincial tax structure left essentials exempt, giving a benefit to the poor and ensuring that they could afford the basics like clothing and heat, but the total tax debt was high because of the tax rates on goods at the high end of the scale, the big-ticket items. This new deal the government has struck gives a break to consumers who buy big-ticket items, at the expense of the poor. We believe, as the government comes up short on revenues, it will simply have to get its revenues from another source; by imposing new taxes or increasing taxes that are already there elsewhere within our budget.
The three revenue-generation measures that I mentioned are the beginning of that search for new income. With the new insurance tax, a car buyer will see the savings in vehicle tax offset by the increase in the net costs of insurance premiums.
How will the economy fare under the new tax structure? The provincial Minister of Finance has predicted that an economic upturn would offset the losses in those particular revenues. The provincial Minister of Social Services, in a paper released by her department, has predicted an economic downturn which will result in lost revenues to the province. Unless these two positions can be reconciled, the HST should not be introduced.
A closer examination of the finance minister's figures indicates that they are grounded on an assumption of extraordinary revenue growth. The value of retail trade in this province last year was $3.3 billion. To make up for the loss of $155 million a year, the volume of retail trade would have to expand, based on the 8 per cent our province will get, by $1.9 billion to $5.2 billion. That is an increase of 58-per-cent growth in retail trade, to make up for those figures.
Even most people who expect there will be a better tomorrow would be embarrassed by growth projections of that magnitude. They are quite simply unrealistic, yet, they form the basis of the finance minister's claim that the economy will grow to such an extent that it will offset the loss of revenues that we will incur by moving from the RST, and GST, to an HST system.
While the finance minister's unbounded optimism has not been reflected by other sources, the Minister of Social Services' projection of economic and revenue decline indeed finds support elsewhere.
Newfoundland and Labrador has experienced excessive out-migration for many years, with the loss increasing in recent years, and Statistics Canada has indicated that we will lose another 40,000 people over the next 20 years. Population decline in a context of national population growth translates into equalization payment declines.
Our population is aging, according to demographics laid out in our census report, and seniors have proportionately greater and costlier health care and other needs while generating proportionately less public revenue. The evidence belies the prediction our finance minister has used to sell this deal as a break-even deal. In reality, the provincial government will be short of the revenue it needs to finance essential services here in our province.
One of the greatest problems is that we are locked into this. We lose our autonomy. No longer can our province set its own tax rate under this agreement. Ottawa can raise it unilaterally. Any province can veto a tax decrease. The loss of autonomy is dreadfully significant.
Our government has given up our right to make changes to our own taxes. If we are faced with a revenue crisis, we would have to consider other options, including cuts and income tax hikes, neither of which we can afford.
It is also frightening to hear from the Minister of Finance that the government is so optimistic that it has no contingency plan in case economic and revenue growth do not occur to the levels projected by this government. Blind faith does not open hospital beds or better educate our children in a time of a revenue crunch. I ask: Is a crunch possible? We are in one already. We are going through the seventh year of cutbacks and layoffs, and the future unfortunately looks no better today than it did seven years ago.
This harmonized sales tax agreement will hurt Newfoundland and Labrador. It will drastically affect low-income families when added costs are put on heat and children's clothes. It will take billions of dollars out of government revenue when we need this revenue for health care and education. It is taking away our autonomy to tax. The HST was forced on us without any consultation whatsoever. It was signed quietly and secretly, and it is a bad deal. It is a deal that the Progressive Conservative Party of this province would not sign, and a deal that I ask you to ensure does not pass.
Senator Rompkey: The Progressive Conservative Party of Newfoundland may not have signed the deal, but Mike Harris, when he was in opposition certainly supported such a deal. In a debate with the Canadian Manufacturer's Association when he was in opposition, he said that Ontario could have had a harmonized tax if the Liberal government had not stated that it was politically unpopular and that they would fight it. He said that Ontario could have had that competitive advantage all these years if the federal government had acknowledged that it was going to shift from a manufacturer's tax to a VAT. He said that, if we had one VAT, one base, and one bureaucracy to collect it, the manufacturers and the businesses in Ontario would save over a billion dollars.
Is there any consultations between the two conservative parties? When he was in opposition it seems he thought was a good idea, but he has not put it into effect. If it were in effect in Ontario, would this be a good thing?
Mr. Sullivan: First, Mike Harris is not the premier of Newfoundland and Labrador, and they are not a party to this agreement. Second, I do not think anybody in this country disputes having one tax collector, a single, common base. I spent over 20 years in business and I know there are advantages in having one tax collector.
Our province went into a harmonized deal and shifted the taxation from the rich to the poor. The poor now are picking up a more disproportionate amount. $155 million in revenues has moved. Big-ticket items will be reduced by 4.84 per cent, but poor people will spend a significantly higher portion of their money on necessities. That is unacceptable. A deal that would be acceptable by all provinces in Canada would have advantages. If there were no tax-inclusive pricing, that would be a further advantage. However, when you look at it in total, there are very few, if any, positives in this for Newfoundland and Labrador, and that is who I represent here. I certainly speak on behalf of the Newfoundland and Labrador opposition.
Senator Rompkey: I would take issue with your view of the future of the province as you have expressed it at the bottom of page 6 where you say, "...the future unfortunately, looks no brighter." You also speculate about what will happen -- "if the economy does not rebound", which indicates you do not think it will rebound. From what you have stated, both orally and in your brief, you are not necessarily convinced that there is a bright future ahead.
I have to tell you that, coming from Labrador, people are very optimistic indeed. They have found 150 million tons of nickel which will involve corporate taxes and royalties. There is oil recovery offshore, with the possibility of further fields being developed in the near future. There are clear indicators that the future is very bright indeed. Do you not share that optimism?
Mr. Sullivan: Predictions for 1997 indicate a decline in our provincial economy.
Senator Rompkey: I think the next two to three years will be difficult, but I am talking about beyond that period.
Mr. Sullivan: Of course I am concerned about the future. In fact I am far more concerned about the future than I am about the past. I would like to certainly address that point, Senator Rompkey. This province has tremendous potential and that was also the case back in the sixties. We have always had an abundance of in our province. However, nothing has convinced me that we will maximize the benefits from those resources. Two years ago the government introduced legislation which benefited marginal companies. We supported that step. However, Inco has now advised that, under the legislation in this province, they have a ten-year tax holiday.
Senator Rompkey: I understand that is to be reviewed.
Mr. Sullivan: We have been calling out for a review for almost two years, but it has not been done. Inco bought Voisy Bay from Dynasty after the ten-year tax holiday was put on the books. If the legislation is amended, you must consider what the implications will be for the shareholders of Inco who paid $4.3 billion to buy a company which they thought they had a ten-year tax holiday.
I have some concerns of a legal nature which I have raised them in the House of Assembly. There may be repercussions. Inco may have certain powers that it can enforce to a certain degree if it does not get the deal it wants out of Voisy Bay.
I certainly agree with you that we have tremendous potential in the off-shore. A trans-shipment terminal is going to be built here which will create only 20 to 30 jobs. Hibernia, by comparison, created between 5,000 and 6,000 jobs. Voisy Bay will only create half the jobs that were created at the gravity base structure in Bull Arm.
We have not built into it a substantial taxation regime that will give us the revenues we need. We have rolled back the 4-per-cent tax break on Hibernia and off-shore fields and all taxes relating to the trans-shipment will be zero. They made that retroactive to any costs incurred in the trans-shipment.
We have foregone, in this province, $190 million in sales tax revenues in the Hibernia structure. That is what it has cost us to get the gravity base structure here. We even allow certain write-offs on total charges at the terminal against royalties that we will receive.
I have grave concerns that we will sell-out our resources and that we will not not maximize job creation and revenue in this province. We must operate under the current legislation of this province, not on what it might be in the future. I do not see a brighter tomorrow based on any figures and projections I have received.
Senator Losier-Cool: Some mention was made this morning about technology? Have any computer companies expressed an interest in opening plants in your province?
Senator Rompkey: There is a very strong hi-tech sector here in St. John's.
Mr. Sullivan: If there are projections of improvement in our economy, those projections are not based on the implementation of the HST.
Senator Losier-Cool: I was referring to technological prospects.
Mr. Sullivan: I believe that, provided we make the important, critical decisions over the next two years to guarantee that we get a return on our resources, we do have an opportunity to enhance our position in the long term. As of today and under current sitting legislation, that optimism, I do not share.
Senator Rompkey: With regard to businesses and the costs that they may or may not be able to afford, we certainly heard from businesses that they did not like the tax included in the price although they certainly agreed with the HST in principle, and many of them agreed that these costs could be handled.
Mr. Sullivan: I am sure that businesses agree with the principle of a single tax and a single collector, however, I am not sure that they would agree with the specifics of the HST as they will apply to our province.
For example, $50.5 million is collected in corporate taxes from business in this province. A few years ago, we received corporate taxes of almost $80 million. There has been a significant downturn in profitability in businesses here. I have followed the proceedings of Senate and House of Commons finance committees, and business after business has stated that it will have problems with tax-inclusive pricing. They say that will have a negative impact.
Senator Rompkey: Let us separate the two. I agree that they have a complaint in regard to tax-inclusive pricing. However, they have told us that they like the idea of the HST, and that it will be a benefit to this province and to other Atlantic provinces.
Mr. Sullivan: From a business perspective, if you eliminate tax-inclusive pricing, there can be benefits.
However, we also represent people who have low incomes. There are only 188,000 people working in this province which amounts to only one third of our entire population. This harmonized tax has shifted the burden from the rich, people who have incomes, and it has put it down on the backs of peoples who do not have incomes.
Senator Rompkey: I ask that question because, on page 3, you state:
Most businesses can't absorb costs without increasing prices or laying off employees. Businesses have good reason to be fearful of the impact...
That is not what we heard from the business group. They talked about tax-included pricing.
Mr. Sullivan: My comments are based on tax-inclusive pricing from the business perspective. Most businesses will have to increase their costs. Those extra costs, extra labour costs, will have to be reflected in their prices.
My concern with tax-inclusive pricing is that it will eliminate extra consumer spending and any increase in disposable income. That will be transferred into the cost of the goods now, and it is will never find its way back into the pockets of the consumer. Tax-inclusive pricing will drive up the cost of the goods.
Senator Oliver: Mr. Sullivan, I would welcome you to our committee hearings. It is very important that you are here today as the Leader of the Progressive Conservative Party in Newfoundland and Labrador.
As you know, we are holding hearings in the three provinces that will be affected by this tax. We have just come from two days in the province of New Brunswick and we will be in Nova Scotia tomorrow.
When we were in New Brunswick, Mr. Bernard Valcourt appeared before us. He, like you, pointed out how this tax will hurt the poor and people on fixed incomes more than anyone else. He also stressed that there was strong, widespread resistance to tax-included pricing.
My colleague raised the issue of the position of the Progressive Conservative Party in this debate. Of course, you know that we would not be here to listen to the people of Newfoundland and Labrador if it were not for the insistence of the Conservative members in the Senate. We are listening, for the first time, to those who will be affected by this tax because the elected people chose not to listen.
We have learned that this tax has not been well described and explained. Many witnesses have said that they do not know what is in store for them in that they do not know what will cost more on. The government has done a very poor job on explaining it. Is that the kind of reaction you have had?
Mr. Sullivan: Very much so. All of my attempts to have this matter debated in the House of Assembly have failed. It was tabled in the House just before the Christmas break last year and, in a matter of days, they invoked closure on the debate on the bill. They also gave notice of closure on the committee stage of the bill. There was no further debate in the House; no public forum; and no further committee hearings. I held a news conference and spoke on open-line shows in the hope that public hearings would be held. However, the people did not have an opportunity to express their opinions. On April 1, when they start to feel the effects of this in their pocket books, they will be wondering what hit them.
Senator Oliver: Yesterday, the Minister of Finance in New Brunswick appeared before us, and when we asked him about how this new tax will affect people on fixed incomes and poor people, and so on, he told us that they will introduce new legislation to help those people. What is being done in Newfoundland and Labrador to assist people on fixed incomes and those with low incomes?
Mr. Sullivan: Unlike this province, Nova Scotia and New Brunswick have moved forward with certain initiatives. Newfoundland and Labrador has not moved to assist those who may be adversely affected as a result of harmonization.
Senator Oliver: Did you make any suggestions?
Mr. Sullivan: We discussed exemptions on children's clothes. We put forward numerous suggestions. I addressed that issue at a news conference and pointed out several main areas of concern.
The government was strongly opposed to any increase in the cost of power but now the tax on electricity and fuel will be increased from 7 per cent to 15 per cent.
We have also requested that children's clothing be exempted.
We also spoke out strongly against taxation on books. Nova Scotia finally relented in this area and made some changes in that regard.
There has been no response to our initiatives. I have grave concerns about shifting the tax burden from the rich to the poor, particularly when only one in three people in our province is working today.
Senator Oliver: You have joined the ranks of other conservatives who have said that tax-included pricing is one of the worse parts of this new tax. We on this side will fight to ensure that, somehow, that is removed and that some measures are in place to help the poor and to those on fixed incomes.
I appreciate your coming and adding your voice to what we are trying to do for the people in Atlantic Canada.
Senator Angus: Mr. Sullivan, I would like to welcome you here and congratulate you, not only on your fine presentation today, but on the great work you are doing as leader of the party here in Newfoundland and Labrador.
Were you in the room earlier this afternoon when Mr. McGrath was explaining to us how he felt the legislation around the HST could be ultra vires, and possibly unconstitutional because it represents an abdication by the provinces to the federal government of one of the principal exclusive jurisdictions under the Constitution?
Mr. Sullivan: No, I was not. I arrived back from central Newfoundland just before the hearing here today.
Senator Angus: Have you considered this abdication of certain elements of the sovereignty of the provinces, the three Atlantic provinces, in this tax?
Mr. Sullivan: We have not specifically considered that, although we were aware that there was some indication of that being the case. I think it probably came from Mr. McGrath several months ago. I am not certain where we could go on that particular issue, whether it is an infringement on our province's basic right to their taxation by a federal government. We did not concentrate on the constitutional question for the simple reason that we felt we should pursue other areas. That could be a very long, drawn-out affair.
Senator Angus: I was quite interested in what Mr. McGrath had to say. We also heard from other witnesses in New Brunswick yesterday who indicated that there was constitutional element here.
You indicated, I thought quite candidly, that you believe there was something underhanded about how this legislation has been visited upon the good people of Atlantic Canada. Could you elaborate on that?
Mr. Sullivan: This particular measure is being forced through. There was no public consultation process. It was not addressed in the House. Any reference to it was shrugged off and moved on, like it was a plague.
I am very suspicious of this tax and of our Premier who would not allow public discussion of this tax and who rammed it through the House in a matter of two or three days. The whole public process was circumvented. He has not responded in any positive manner to any of my requests for open discussion. This deal, which involves only three liberal Premiers representing between 6 per cent and 7 per cent of the total Canadian population should not proceed.
I think it is wrong. It is politically motivated. It is not based on fact. It is not based upon the interest of the people in our province, and I certainly take great offence with that.
Senator Angus: They have alienated so many people, whether they be doctors, the working poor, the elderly, the members of the Chamber of Commerce, and so on that I wonder why they have done this. Why do you think they are doing it?
Mr. Sullivan: The last election campaign Atlantic Canadians in 32 ridings expressed their resentment to the GST. The public put their faith in a party who said they would get rid of GST, would scrap GST, and not hide GST. The people relied that promise.
Prince Edward Island would not touch it. When they had a Liberal premier, they would not touch it because they knew the public would resent it, that it would be unpopular. I think it is entirely politically motivated and it does not respect the interests of the people in the province.
Senator Angus: Have you examined the memorandum of understanding which you mentioned earlier?
Mr. Sullivan: Yes, I have.
Senator Angus: I noticed it states that it will take the agreement of two of the three provinces to increase the tax, but that it requires unanimous consent to decrease it. Would you comment on that?
Mr. Sullivan: That is right. A single province can veto a decrease. In other words, if we want to decrease it and if Nova Scotia does not agree, then it cannot be done. A single province can control our autonomy over our taxation. That is a problem.
If we are giving up autonomy to a degree and you are deriving benefits from that, I can understand it. However, what benefit do we derive by giving up our autonomy by agreeing that a single province can determine our taxation level? That makes no sense to me. When you give up something, you get something in return. We got nothing in return.
Senator Angus: Exactly. What would suggest that this committee recommend?
Mr. Sullivan: I mentioned in my closing paragraph that we have seen $155 million siphoned out of this province in badly needed revenue. We have a declining population, and sales will be down $24 million this year over last year. We have a declining retail sales base. We have lost revenue. We have shifted the burden from the rich to the poor. There is only one recourse, and that is to scrap it.
Senator Angus: Entirely?
Mr. Sullivan: Entirely. It is asinine to have a tax in which only 6.5 per cent of Canadians participate. It is ridiculous, and it should not be entertained. It should be put aside. It should be scrapped.
At some time in the future, if conditions are different, if the specific agreement is different, if the Canadian population is willing to buy into this, then it should be considered again in that context in the future.
Senator Angus: Bill C-70 is put forward in two parts. Have you noted that the first part deals with something quite, if not entirely, unrelated to this issue we are discussing today? In other words, the second part of Bill C-70 deals with the HST and the kinds of issues you have raised.
Mr. Sullivan: Yes. It is part of the bigger parcel.
Senator Angus: Assuming for the moment that the first part is satisfactory and that it has been drafted on the basis of findings, after trial and error over the last several years, which would improve the exiting GST. As a legislator do you feel, however, that the second part could be easily severable from the first part?
Mr. Sullivan: It is possible. I certainly think the harmonized aspect should be scrapped outright. I have not gone into the detail of the other aspects. I have close follows the proceedings in the House of Commons and its committee. I have read the transcripts. However, I have certainly focused on the harmonization aspect of this bill, which I think is Part II, and I have not gone into the details of Part I. I cannot speak to what might be contained in that part which could affect elimination of Part II.
Senator Angus: You mentioned that during the debate in the House of Assembly notice of closure was given; is that correct:
Mr. Sullivan: That is correct. It was given at both stages of the bill. A closure motion was moved.
Senator Angus: That also happened in the House of Commons.
Mr. Sullivan: Yes. Before all nine opposition speakers had an opportunity to intervene, the closure motion was put forward.
Senator Angus: Has that ever happened in your experience in the legislature?
Mr. Sullivan: I believe there have only been four or five closure motions between 1949 and 1989. I was elected in June of 1992, and I think we have dealt with approximately 17 since then. I am, of course, referring to the provincial legislature.
Senator Angus: That is what we are talking about.
Mr. Sullivan: In this past year alone, since the current premier took office, we have had at least four or five closure motions. In fact, in one particular instance, on an amendment to the Education Act, before even one speaker on our side had an opportunity to intervene, they moved the closure motion. It is complete autocracy. There is no opportunity for discussion by elected members in the legislature. I have stated on the record that, as an elected member, I take great offence at being unable to stand and have an opportunity to speak on a bill before closure in invoked.
Senator Angus: I take it the government has a sufficient majority?
Mr. Sullivan: Yes, they do.
Senator Angus: In your opinion, is there any real need to invoke closure?
Mr. Sullivan: No, there is not. There is a total of 11members in opposition in a legislature of 48 people.
Senator Angus: It is like a dictatorship. It is a terrible thing.
Senator Hervieux-Payette: I hope you are not discarding Quebec as being a pioneer in the harmonization of the sales tax. We have 90 per cent harmonization. It was well done by the Conservatives, that we have some experience. Have you consulted with your Quebec counterpart to see if Quebecers have suffered all the difficulties that people seem to think passage of this bill will produce? They have experience in this area.
Mr. Sullivan: I do believe Quebec has a collection system which is different from the GST collection.
Senator Hervieux-Payette: It was negotiated with the federal government. Authority was given to the province of Quebec to collect the taxes on behalf of the federal government, and the federal government compensates for the collection. There is only one tax collector. My question is: Have you asked if there was difficulty in implementing this harmonized system?
Mr. Sullivan: No. I am fairly familiar with the Quebec situation and the 6.5 per cent I am referring to are the parties to this agreement. The three provinces represent only 6.5 per cent of the Canadian population. I certainly did not mean to imply that Quebec is not a part of the total percentage. This particular agreement is the basis upon which I made my statements.
Senator Hervieux-Payette: Have you heard of any drastic loss of revenue in the Province of Quebec, or any other major problem?
Mr. Sullivan: No. I do not think anybody would have a problem with there being one collector, whether it be the Province of Quebec, the Government of Canada or the Province of Newfoundland and Labrador. The one-collector aspect is good for business overall. I have never questioned that. In fact, much less bureaucracy would be involved. Why should we have two collectors instead of one?
On that point, it is rather ironic that the lone Atlantic province that has not partaken in harmonization is the one which has the collection centre, and that is Prince Edward Island. That province will reap the benefits in jobs from harmonization, and we will jobs here in our province.
Senator Angus: Do you think it is fair to that taxpayers in the rest of Canada should pay this $961 million to the people of Atlantic Canada?
Mr. Sullivan: When our province is losing $155 million on this deal, it is not a deal that is acceptable to this province. It is particularly unacceptable when we shift the tax burden from the rich to the poor. It is not enough money that would entice me to join this deal when we receive $348 million, and we are going to lose $155 million a year. Based on figures provided to me by the Minister of Finance he will collect $90 million in extra revenue. However, I would not consider this deal at all, even from a strictly revenue perspective.
Senator Angus: He may be having second thoughts. He has just come in. He is smiling at your remarks.
Senator Oliver: You told us that the provincial Minister of Finance has indicated that the government will introduce new tax revenue generation measures in the fields of insurance, vehicles, tobacco and alcohol sales. Is that to help compensate for some of the losses being brought on by this new HST?
Mr. Sullivan: Yes. I outlined how, last year, we had $565 million in retail sales. I obtained figures from provincial sources and from federal sources who told me that they collected between $279 million and $283 million in GST in this province in the past two years -- depending what months you take your figures it could vary very slightly -- so 8 per cent of that rate gives us $320 million. Therefore, we are down $245 million.
They instituted those three new taxes, a 15-per-cent insurance tax; a 15-per-cent tax on the private sale of vehicles; and a freeze on alcohol and tobacco taxes rather than reduce them. I am informed that, based on these figures, that would bring in $75 million. There are some other measures that he did not outline to me which would bring the total to $90 million. That is where the $90 million came from. When you subtract that from $245 million you arrive at my figure of $155 which we will lose. The minister says it will be $105 million. I have not discovered where the other $50 million will come from, and I am very eager to find out. It may be that a new tax will be announced on March 20.
The Chairman: Our next witness is Mr. Paul Dicks, the Minister of Finance for the government of Newfoundland and Labrador. I know that you have an opening statement and then we will proceed to questions and answers.
Mr. Paul Dicks, Minister of Finance, Government of Newfoundland and Labrador: I would thank you for the invitation to be here. I do not have a statement as such. I thought we might spend the time more productively fielding any questions or just discussing the whole issue. I know there are matters of some active interest to members around the table.
Senator Angus: Minister, welcome to the committee. We appreciated the briefing you and your colleague were able to give us. It has made us more adroit in our understanding of the issues.
A question I want to explore with you today has to do with the alleged unconstitutionality of this bill. I know you have very competent law clerks in your legislature. I also know that, as a former Minister of Justice, you would not want to have anything to do with any ultra vires legislation.
Learned witnesses have suggested that this "package", if you will, the bills introduced by the three Atlantic Province plus Bill C-70, the federal legislation, involve or imply an abdication by the provinces of one of the exclusive taxing rights and an effective broaching of the watertight compartments which were made sacrosanct in the original BNA Act. Could you comment on that, sir?
Mr. Dicks: Yes. Early on we looked at the constitutionality of what we were doing, and we considered different methods of implementation. Of course, you could look at delegation and other methods. We resolved those issues. The legislature is sovereign. We passed an act in our province to, effectively, address any constitutional issues that might arise. We were going to delegate that power, but that did not seem to be the right way to do it. We, in effect, have mirror legislation, and we have embodied the agreement in legislation which was passed by the House last December. Since then, I have not heard anybody mention any question of illegalities.
Senator Angus: Earlier today Mr. McGrath quoted a Supreme Court of Canada decision involving the Lord Nelson Hotel and The Province of Nova Scotia which, on the face of it, seemed to be persuasive jurisprudence.
Mr. Dicks: I know Mr. McGrath from the pre-budget hearings he attended last year Frankly, I think there is a misunderstanding of the law, and some confusion about what sections 91 and 92 entail. There is no question that the province can do what it is doing. We see no constitutional validity to the argument that was made. I do not think his was proper reading of the case and it has no application to what we are doing.
Senator Angus: In terms of the federal statute, then, although I realize it is a different jurisdiction, you have no reason to believe that we would, perhaps unwittingly, become a party to an ultra vires statute?
Mr. Dicks: No, I do not think so. I think it has something to do with direct and indirect taxation powers, and the federal government has both. We, in the province, of course, only have the power to directly tax. My concern about integration arose when the GST was introduced. I was not a convert. It took me about six years to become convinced that we would should do it. I was in the Department of Justice when the issue surfaced.
We have been keen on doing it for some time because there were a lot of advantages to our business sector, and we believe it is a reasonable way to reduce what was the highest retail sales tax burden in the country. However, when it was first introduced, I thought of it not so much as an issue of constitutionality but as one of custom, that the federal government had intruded into what had been a provincial domain. Of course, with so many other taxation fields at its disposal, I questioned why they would intrude into our domain at that time. Of course, it eroded our ability, and it eroded, to some extent, the economy, because you were taking 7 per cent off people's disposal income after tax. I had questions about it, not so much from the standpoint of legality, because certainly the federal government had power to do it, but more so from intruding into a domain that they had generally left to the provinces, as much as we do not intrude into the municipality's right to tax property. We leave that to them, I think more out of respect than legality.
Senator Angus: One of the elements related to this particular issue which has come to my attention, involves the memorandum of understanding which you would have executed with the sister provinces and the federal government on the question of lowering the tax. If one of the provinces wanted to lower the tax, for example, any one of the other two can veto it. It would seem to me to be a very bizarre provision, and I wondered what you thought of that, and perhaps share with me the rationale behind it.
Mr. Dicks: We are into a four-year agreement. We did have some concerns about the extent to which we would limit the province's right to either raise or lower the taxes. The reason it is in there is directly tied to compensation. The federal government did not want, during this period of time, to raise taxes because the compensation is geared to a formula, as you know. If that has not been explained I certainly would be prepared to do it.
As regards lowering the rate, that was, basically, a companion provision. We wanted to try to keep the tax system uniform throughout the Atlantic provinces. The reason for that, of course, is people will generally shop where they can have the least tax burden. That has been a factor here in Newfoundland and Labrador. We have had a very high tax burden which has encouraged people to cross borders. When they are travelling, they buy in the jurisdiction where either there is no retail sales tax on a particular item, or a lower rate.
We did want to have that for our own protection because we see it as a regional advantage to us all to keep our rates uniform for some time.
Senator Angus: To me, that would imply that you would agree with those many witnesses who have said that P.E.I. will become a tax haven in Atlantic Canada and they will have a boom and poor Newfoundland and Labrador will go out the back door.
Mr. Dicks: I thought it was the other way around, that with harmonization there is a tremendous competitive advantage for our business sector, and I think any province that is not part of the system will have a disadvantage in not being on board. It makes our business more competitive because we are at a lower rate and then, of course, we get the business input credits as well. I would think P.E.I. will find it very difficult to stay off side for a long period of time.
Senator Angus: The other issue that has been front and centre in our hearings the last three days has been the question of tax-in pricing.
Mr. Dicks: Yes.
Senator Angus: I think Senator Rompkey and I have a slight difference of opinion as to whether it was one or one and-a-half witnesses out of 60 who saw any good in the tax-in pricing but, in any event, many witnesses have told us that they cannot see the rationale for it, that they like the concept of harmonization, but that the cost involved with the tax-in pricing will override any benefits which would have been gained by the initiative. It seems to me and my colleagues on this side at least that the tax-in pricing must go and that it will not bother you, it will not change your life at life at all and, indeed, the various economic benefits that one hopes to derive in all of these three provinces will not be interfered with if you did take it out. What do you think of that?
Senator Oliver: The two are severable.
Mr. Dicks: Yes, absolutely. Frankly, it is in our agreement. We were neutral on the whole aspect of it although I should say I favour it and I will come to the reason for that. I think the federal government would prefer to have tax-inclusive pricing, and one may speculate about the reasons, but certainly in coming to the conclusion of this agreement it was an item on the federal government agenda.
Having said that, I probably have been the strongest proponent of implementing it for a variety of reasons. One is I do hear from the public that it is confusing when not to have it included in the price when they shop. People prefer to have a tax-included price. In any of the VAT jurisdictions in Europe customers know what the price is. Here, people sometimes suffer from "sticker shock". They see the price of $50 but, in fact, they must pay $60. I do not think people ever become accustomed to that. I have been Minister of Finance for a number of years and I am shocked when I must pay the tax on anything I purchase in the province.
Having said that, visitors to our province in particular find it very troubling. Merchants will tell you that when people realize the must pay 20-per-cent tax on an item, some of them will return it rather than purchase it. I think there is a business advantage at the retail level for tax-included pricing.
Where we have encountered any resistance to it in this province has been with national chains for the most part. Frankly, much of what they say is untrue. They say that with national advertising, they can only publish one price across the country. We have checked into that and some of them have nine different regions. I think you should take what you hear on tax-inclusive pricing with a grain of salt. It is an inconvenience for a business to display the tax-included price but, having said that, I do not think we have done the business community any favours by giving them four options. We should have been firm that there must be tax-included pricing. In trying to respond to the business community's demands, we have now put ourselves in the position of being criticized because we have given them too many options. They find it confusing.
It is a tremendous advantage to the business sector. In our province there will be approximately $170 million in business input credits. When people have been difficult on the issue I have told them that they can have the current system at 20 per cent with no GST input credits, or the new system at 15 per cent with input tax credits with tax-included pricing. The choice is theirs. Having said that, I hear no more about it.
Some of my colleagues do not share that view, but I think it is a matter of convenience to the public and of some inconvenience to the private sector. Every time I have challenged them to come forward with costs they put forth every argument in the book as to why they do not want to do it. They talk about the cost of changing cash machines which can record tax at 19.84 per cent but somehow cannot deal with 15 per cent.
I am sceptical about much of what I have heard. I have expressed this view to our business community, and our business community, by and large, is on side. However, like everyone else, they would rather not relabel their stock and there are some issues with respect to pre-priced goods, but from my point of view it is a neutral matter. I think some people are just being a little contrary about it. I tend to get that way myself on some of these issues.
Senator Angus: I think probably we all do, minister, but the fact does remain that, if there is a significant number of businesses that believe they will derive benefits from the tax-in pricing they did not take the opportunity to come and tell us that.
Mr. Dicks: It is an issue but, from my point of view, I am fairly neutral on it. I think that we are losing sight of the overall advantage to the economy and the business community, and it is being tied up on a very small issue. I would be happy if it were put off to one side.
Senator Angus: We had some doctors here this morning from the Newfoundland Medical Association, and I was mindful of the briefing yesterday and the view of the government, or what I understood to be the view of the government, that it does not regard these doctors in private practice to be small businesses but rather, because of the source of their incomes, to be more part of the civil service. I could not encourage these witnesses to agree with that position. Could you explain that to us? This may be more of a federal issue than a provincial one, but it is a very sore point. Doctors are important to us all, and they are very unhappy with this.
Mr. Dicks: I met with the NMA a couple of times in the last year. Their issue is that they will be hit with, by their estimate, about $1 million. I do not know if they shared a figure with you. That issue is not in our hands. The federal government determines, by and large, the base and to whom it will apply, which are zero-rated, and so on. I have some sympathy for their position, but it is not something that we ourselves deal with directly. I think it is a larger issue of which businesses will be zero-rated. They are one of the groups that really do not have the advantage of input tax credits because they do not charge PST at the other end even though they are business as such. I have some sympathy for their concerns but I would think that is something that probably Mr. Martin or the federal government should address.
Senator Angus: He is coming to see us at nine o'clock on Monday morning when we will have a few doctors in the room.
Senator Rompkey: That happened in 1991 when the GST was introduced. Mr. Martin was not part of the government at that time.
I want to ask you, minister, about new housing. Of the groups who appeared in front of us, the compelling argument for me was made by those who build new houses. What has been your response to them? They feel that starts will remain stagnant, that prices will go up, and that this will have a negative impact on the economy and on consumers.
Mr. Dicks: I could reply to that in several ways. We have a disagreement with the home builders as to what the impact will be on new house prices. We have it at .9 of a per cent. They have done studies that indicate up to a 5-per-cent increase. More recently they have come down closer to where we are, between 1.5 per cent and 2.5 per cent. Part of the difficulty with their position is that they claim that there will be no flow-through of direct input tax credits. I have told them I have no sympathy for their position if they are saying that new home price will increase because they will not be giving the benefit of input tax credits to their customers.
That is our position, and we have been unable to resolve the situation. The increase in price on a $120,000 home would be approximately $2,400, and that, normally, would be amortized over about 20 or 25 years. It probably adds about $20 to a mortgage payment at most.
All the studies we have done show that, at every income category, people will have a benefit. Between $70,000 and $100,000, people will have the benefit of approximately $1,100. Even someone on as low an income as $10,000 will have a benefit of $182, and this taking the Stats Can model and applying it to what people use.
Recently, in Labrador City, I was questioned about this by a lady. I told her she should calculate what she bought this past year and that she would find that she will save money. She came back and told me this year she did it, and that she calculated she would save $1,000 when we implement the system.
My answer to the home builders association is we will have a lot of growth in Newfoundland and Labrador. I do not think it will affect housing starts, and I expect that the added costs will be more than offset by the savings people make. We are not talking about a lot of money. I have a little difficulty in relation to how they are arriving at the increase, more than anything else. Whether or not any relief is warranted is not my decision, but is one we will make between now and the budget on March 20.
Senator Rompkey: I wanted you to talk about the benefits of harmonization for consumers, and particularly those on low and fixed incomes. We have heard from various groups, from doctors to anti-poverty groups and seniors groups. A great deal of concern has been expressed about the benefits of harmonization by those who have low or fixed incomes. Would you comment on that?
Mr. Dicks: As I said earlier, we have been working closely with social services on this issue. We started with the Stats Can model of what people purchase. If you look at the vast majority of goods that people do tend to purchase, whether it is razors, shaving cream, lotion, clothes or pizzas, people at low income levels generally purchase the same things other people do. They buy more or less of it depending on their income. If we can accept what Stats Canada outlines as the customary purchases by people at different income levels, people with incomes as low as $10,000 will save $182 on average.
Having said that, I do not suggest that everybody follows that model and I am a little concerned that some people may be disproportionately affected. For example, an elderly person who may not get out much, and who is living in an old home that is not that well insulated, may be unduly impacted by the added costs of domestic fuel. I have some concern for that particular group but I think across a broad spectrum, even at low-income levels, the savings generated by the reduction on a very broad base of goods will probably more than offset the added cost.
The other factor is that many people at low income levels do not have the same additional cost burden for services, for example, accountants, lawyers and others at higher income levels. The domestic fuel increase concerns me for people in low income groups, and in our general budgetary response we will consider what might be an appropriate response to that.
Senator Rompkey: Can you tell us what that might be say today?
Mr. Dicks: I must save something for the budget, senator.
Senator Cochrane: I would begin my questioning, Mr. Chairman, with a supplementary to Senator Rompkey's question. Realizing that Nova Scotia and New Brunswick do have legislation to relieve the burden on the poor and those on fixed income, will this province introduce legislation along those lines?
Mr. Dicks: Nova Scotia and New Brunswick had their budgets in the fall. They are on a different budgetary cycle from us. Ours is usually in late March. If anything is to be done in that regard, I will announce it in the budget. It is an issue of which we are very conscious and we will determine if some level of relief might be appropriate. I can add nothing beyond that.
Senator Cochrane: The province negotiated with the federal government to introduce this harmonized sales tax and, in return, this year it will receive, if it has not already, $127 million.
Mr. Dicks: We have received it and I put it in the bank on Friday of the Thanksgiving Weekend, and on the following Tuesday morning the province was $100,000 richer for the experience.
Senator Cochrane: The province will receive another $127 million next year; is that correct?
Senator Oliver: No, we have received the full $348 million in a lump sum payment.
Senator Cochrane: I understand that this is compensation for the $105 million which our provincial government will lose in revenue; is that correct?
Mr. Dicks: Yes.
Senator Cochrane: That being the case, how will this province adjust to that loss?
Mr. Dicks: We do it in a number of ways. In the year we negotiated this, our retail sales tax revenue was $570 million. As a result of the change from 12 per cent down to 8 per cent, which is added on to the GST, our rate is effectively 12.84 per cent. If we had not made any adjustments we would have lost $190 million. We have made some adjustments to keep our loses at $105 million.
We have done several things. We have raised the tax on insurance policies, which is now at 12, to 15 per cent, so that additional 3 per cent gives us about $25 million. We will tax sales between individuals of used vehicles, at the rate of 15 per cent, which is the equivalent to the other rate. That will yield another $25 million or so. There is about $10 million in some institutional adjustments that we may or may not choose to make, and we will neutralize the effect of harmonization on liquor and cigarette prices. If we did not adjust our prices upward, liquor and tobacco prices would fall, so we felt it was a rather painless way to find some revenue.
Once we take those three major measures we will reduce our tax loss of about $105 million, we will be fully compensated for that in years one and two. The formula is that we get 50 per cent of our losses in year three, and 25 per cent in year four and that is how you calculate the $348 million. By the time the four-year period runs out, and it is a four-year agreement, we will have to choose whether or not to continue, but I anticipate that we will have sufficient GDP growth to offset the majority of the tax loss.
In very simplistic terms, we will get approximately a $100 million a year. The $348 million we will use to displace borrowing that we would otherwise have to do at 8 per cent, because we normally go for 30-year issues. That $100 million will go into our economy each year because you are reducing the tax burden on people.
People will have, in essence, approximately $100 million more a year to spend. That is .875 per cent of our GDP in nominal terms. Our GDP each year is about $12 billion, so $100 million represents slightly less than 1 per cent. The annual growth should contribute substantially to the tax revenues, and that will increase in years four and five. Our GDP numbers showed that in 1999 we will have dramatic growth in the province. Our tax revenues will be sufficient to offset any loss we have at that time.
Having said all that, it was just too hard to resist the rationalization of what was the highest system in Canada at 12 per cent down to 8 per cent and, effectively, from 20 per cent down to 15 per cent. We had to consider it, and we did it. Hopefully, in the years to come, we will be able to do it in relation to income tax. There will be many advantages to consumers, and I think the tax losses are bearable in the short term and, in the longer term, we will make up those losses.
Senator Cochrane: Going from 19 per cent to 15 per cent will be a savings of 4 per cent, but it is not 4 per cent across the board. The key items that will be increased will, as you know, be electricity, gasoline and many other essentials, and that is where the problem arises. Although it will go from 19 per cent to 15 per cent on car sales, how often does a person buy a car?
Mr. Dicks: Many people buy them every three years. In point of fact, if you look at it, on a $20,000 vehicle, which is about the average, people will save about $2,000. That will more than offset the increase in gasoline prices.
You can overstate the impact one way or the other, but it always amused me that people made two comments: They ask how we will make up the losses, and then they turn around and complain that we will actually tax people more. The most difficult situation is that we are taking a $105-million reduction. I am not am economist, but I can tell you that, in Newfoundland, we generally spend what money we have. We are not great savers. Most of that money will work its way back into the economy. I agree that home heating oil will go up somewhat, as well as electricity but, beyond that, there are very few ordinary, everyday purchases that will increase. Of course, accounting fees or legal fees attract any degree of taxation. The truth is that most businesses will absorb some or all of those increases and pass on the savings through input tax credits.
Senator Cochrane: I am hoping that you are right in regards to the economy rebounding. I certainly want that to happen. What will happen if the economy does not rebound?
Mr. Dicks: Of course, I do not know where I will be in four years time, but I would think that, once you rationalize the taxation system in this fashion, it will be very difficult for anybody to back out of this or raise taxes. My view of it is that we would probably do what we have been doing all along. We have been facing revenue shortfalls the last number of years and we found it through savings in our expenditures. I think that is the way we should go. I do not really support the notion of increasing taxes.
That is my particular view. Whether or not the finance minister in four years time may share that, I do not know. However, I think you must look realistically at the prospects. Newfoundland's prospects for growth are tremendous, particularly after the year 1999. We have the largest capital projects in the country, and those will result in a tremendous growth in our economy.
I cannot give you specific numbers, the they would be substantial. We may have double-digit growth in GDP in the year 2000. Unfortunately we will be able to keep it all because equalization will account for a chunk, but I suppose that is fair enough.
Senator Hervieux-Payette: The federation of municipalities made a presentation to us and expressed concern because in this province, contrary to what has happened in Nova Scotia and New Brunswick, there is an extra burden on the municipalities. Do you intend to address this issue? To what level does the province contribute to the municipal budget? Is it a harmonized contribution or is there some other compensation formula?
Mr. Dicks: I guess you are raising the question of GST rebates to municipalities. We substantially support our municipal sector. We presently convey to them about $33 million in municipal operating grants. One of the difficulties with equalization is that Newfoundland has the lowest level of municipal taxation in the country. We are only at 42 per cent of the national tax effort in that area. It affects our equalization, but it is an area of revenue beyond our control.
NMFC, which is the funding arm that government uses to provide moneys for municipalities for roads, water and sewer, and that sort of thing, is approaching $600 million in debt. The province ends up servicing about 60 per cent of that. A number of our municipalities are in default of their obligations to cost share. I have not compared us with other provinces, but we spend an awful lot of money in the municipal sector providing roads, water and sewer services, and the rest of it.
In many cases the taxation effort by the municipality is very low. If you are familiar with Newfoundland you will know that we have had some historic problems in terms of income and distribution as well as with the fishery in recent years, so many of these municipalities cannot raise much more money. Our situation is different from the situation in Nova Scotia and New Brunswick. They do not tax their municipal sector and we always have. Our municipalities used to pay 12.84 per cent. The other provinces are providing rebates. However, all our figures show that the municipal sector will benefit by approximately $4 million. They will be better off as a result of this harmonization because, instead of paying 20 per cent on certain items, they will only be paying 15 per cent.
The only area where that may not be true is on services that are contracted out. One municipality near here told me that it would cost them an additional $150,000; whereas one in central Newfoundland told me they would be $100,000 better off. The $4 million is it is not necessarily evenly distributed throughout our municipal sector, but it is hard to justify giving a rebate to a sector which will actually have an advantage as a result of this. That is something we will have to decide between now and budget time.
Senator Comeau: Among the many concerns which have been expressed over the past number of days, one that keeps coming back, and for which there seems to be little rationale, is tax-in pricing. Senator Rompkey tells us that a poll was done that showed that 52 per cent of Canadians wanted to have the price in the final product, that they absolutely insist on it.
Senator Hervieux-Payette: It is 79 per cent.
Senator Comeau: I have not looked at the wording of the poll or how it was presented. The rationale for having tax-in pricing is that a poll has been done indicating that consumers prefer to see the cash register price on the sticker. However, apart from one group we heard from in the past few days, every last group that deals with retailers have shown extreme opposition to tax-in pricing. Is there any other reason whatsoever other than a poll why we have tax-in pricing in this legislation?
Mr. Dicks: No. However, I believe most customers would prefer a tax-in price. From a business point of view I can understand the argument retailers would make because they use sticker prices of, say, $1.99 or $5.99, and, when they have to add the 15 per cent on it distorts the price. People in business will tell you they need those price points. They may be required to redistribute their profit margins among different items to achieve that. I am sympathetic to that, but, from our provincial point of view, it is not a critical issue. I think it is a matter of convenience to the public. I think business can make the adjustment. They are certainly in a position to do so.
Senator Comeau: There is no question that when you walk into a store to purchase an item, you want to know exactly how much to pull our of your wallet without doing a little mental calculation. Having said that, could that not be done voluntarily by the retailers, given the comments that have been made over the last number of days?
We sense the same thing in New Brunswick, that is, the Provincial Government of New Brunswick has no great desire to impose this. I do not think the Government of Newfoundland and Labrador is showing an extreme desire to have tax-in pricing. We will ask the same question of the representatives of the Government of Nova Scotia and, if they are of the same opinion, that would be one area where we might be able to satisfy Canadians who have expressed opposition to this. Although this is not the only concern we have heard expressed, it certainly has been raise most often.
Mr. Dicks: Yes, and I think you will hear that from the business sector. I understand their concerns. I think we have complicated it somewhat. One particularly large retailer was very concerned about needing to re-price all of the items in his store and I told him that I had been in his store many times and I could not find a price either on the item or on the shelf. If you go around most large stores where this is a major concern I challenge you to find a price on anything. It might be helpful to the public to at least find one or two prices on the shelf.
As I think Senator Angus said, this issue is not critical because, in this province, when there is a reduction of 5 per cent, that sells a lot of people on the whole notion.
Senator Comeau: Another question that I have relates to Senator Cochrane's question of the shortfall. You have listed a number of items in that regard. I understand the provinces of New Brunswick and Nova Scotia are considering the introduction of a capital tax?
Mr. Dicks: Yes.
Senator Comeau: Is it too early to ask whether you will be including that in your budget?
Mr. Dicks: No. We said, at the time that we did this, that we would not make up any of the shortfall by the imposition of a corporate-capital tax. We want to give the business community an opportunity for growth. This should contribute substantially to our GDP, and make our businesses more competitive. Newfoundland exports a considerable amount of it s products; fish, forestry, lumber, minerals and so on, and I think it will give us a competitive advantage. You would not immediately turn around and take that advantage away from your corporate sector, because part of what we are counting on, and I alluded to this in my remarks to Senator Cochrane, is employment growth in the business sector and we hope to pick it up in personal income tax, corporate income tax and other areas. It is not necessary for us at this time to levy a corporate capital tax. We will not make up the shortfall in that fashion, which is not to say that at some point the government, in its wisdom, might see fit to impose one but it is not part of our package now.
Senator Comeau: Why the big rush? Why rush this through the legislature? Why not simply provide an opportunity to your citizens of Newfoundland to express their concerns about this?
Mr. Dicks: I would have exactly the opposite opinion. I was wondering why there was such a delay. The normal practice normally is to announce a tax change immediately. Last week we announced a sales tax reduction on snowmobiles from 20 per cent down to 15 per cent.
Senator Comeau: This not a simple tax change, this is a major change.
Mr. Dicks: That is right, and you have put your finger on it. I would have been happy to do this last summer. However, we consulted the business community and others. In 1992 hearings were held with the business sector and this idea was canvassed. I raised it in budget hearings last year. Every time a business group came to see government this was on the agenda. There were even editorials in the Evening Telegram. The whole issue has been examined.
I am left wondering how much more consultation we could do. It was discussed in house committees and so on. It is not something we have rushed into, it has been a matter that has been around for about six or seven years and there have been many levels of discussion.
Senator Losier-Cool: Mr. Sullivan, the Leader of the Opposition talked about provincial autonomy being lost because you would be locked into this deal. Would you care to comment on that, please?
Mr. Dicks: Yes, we have given up our autonomy over this taxation area for four years for the reason I have stated, and we are locked into agreements as to what we can and cannot do with respect to rate changes, base changes, and so on. We have lost a certain amount of autonomy, but I think it is worthwhile. We have restricted ourselves in what we can do with retail sales tax in this province for four years. Beyond that there is no long-term loss. It is an agreement that ends in four years' time and it will up to us whether or not we renew it and on what terms. I suspect we will.
The advantages are such that I do not see that the lost autonomy, which is not a long-term thing, will be a disadvantage.
Senator Losier-Cool: There is real confusion about tax-in pricing. As you know everyone is insecure about the unknown. Surely it is the responsibility of both governments, provincial and federal, to explain what this will mean.
Mr. Dicks: We have tried to do that. I have had two years of budget hearings where the issue has come up. Recently in Labrador, for example, I met with the chamber of commerce in Goose Bay. I sent someone from my office to meet with the chamber on the following Monday. I have also talked to service clubs and so on. Often the message does not get through, or people forget. However, some people are not concerned about this.
To the extent that groups have indicated they need more information or that there is something we can do, we have spoken with them and worked with them. We have done it with a number of different groups around the island. Most businesses are familiar with the GST system. Many of them did not understand at first that they would get input tax credits, and we have been informing them about that.
At the general consumer level, I think there is an understanding but there is a suspicion that somehow this is a tax grab by government. I always find that point amusing. People focus on the one or two items that will increase in price, and they forget about all the other things that decrease. It is human nature of a sort to focus on the negatives.
Some items will go up in price, but the vast majority will be reduced, at least on the tax side. Ultimately the cost of items themselves should be reduced once there is the flow-through of input tax credits. That was certainly the federal experience. They found that there was 100 per cent flow-through after the first year when the GST came in. It was not something I believed but having seen it I do believe it to be the case.
I should mention that we have an insert in our RST this month explaining it. We have done what we can to try to reach people and let then know about the system. It might be of some interest to you that now I am most often asked when it will be in effect.
Senator Oliver: The Atlantic Provinces Economic Council did a study on the harmonized sales tax in Atlantic Canada and in that brief report they pointed out three potential problems. You have talked about the first, which is tax-in pricing, and you have told us that you are fairly neutral on it. I would like your comments about next two problems that they raised. The second problem them mention is the tax evasion effects created by the tax, and the third one is the financing problems created by the new tax. What will you do here in Newfoundland about those two?
Mr. Dicks: I am sorry, I do not understand the third problem about the financing aspects.
Senator Oliver: People will need to borrow money to generate more working capital to pay the tax. The first one was raised by the labour unions saying there will be a much larger underground economy now and the province will be losing a lot more tax in the construction and repair of homes.
Mr. Dicks: I have had that discussion. If you look at it the other way this may help deal with the problem of the underground economy. The problem with the underground economy by and large is one of enforcement. Our tax officials are not going out and making sure people are remitting. Our staff were very good at getting people to remit retail sales tax. They went along Duckworth Street, which is next to Sir Humphrey Gilbert Building, and found that 75 per cent of the businesses were not registered for GST. It is a question of compliance. You could speculate as to how much more you might find if you went to the other side of town or, God forbid, to the West Coast where I live.
Having said that, the HST system will work against the underground economy because of the input tax credits. In order to have the advantage of input tax credits you must be registered. If you are in business and you want to have the advantage of being competitive you must register to get the input tax credits. That is a sizable advantage. It is a 15-per-cent flow-through. If you are not registered, cash will only make up for a certain amount of that.
You hear most about the underground economy in the construction trades, but I think even there it will probably be more advantageous to register than not if it is a legitimate business.
Senator Oliver: They must pay the 15 per cent up front and they are saying they will need to go to the bank to get a new line of credit to pay this.
Mr. Dicks: They can turn around pretty quickly as well.
Senator Oliver: It is ninety days. How will they cover that 90-day period?
Mr. Dicks: They can get it monthly. I met with some large business concerns in Labrador. I am sure you appreciate that they must build up large inventories. We allayed their concerns. They can order stock, submit a return immediately, and have payment within about 30 days.
Businesses are getting an enormous advantage with input tax credits, so the costs of carrying the financing is miniscule when compared to the fact that they will get all their own inputs back. For example, of the $570 million we collect, $170 million comes from business consumables. That will be an advantage to businesses. If someone has a financing cost, that will pale in comparison to the advantage to them on the other side.
I was not particularly fond of the GST when it was introduced, but it makes sense for us at a provincial level, and maybe at the federal level, to try to rationalize the sales tax in the country. There is a lot of concern in our province as to whether it will be implemented or not. We were hoping for an April 1 deadline. A reporter asked me what would happen if it did not come into effect on April 1 because that is our fiscal year end. It will cause a lot of confusion and I do not know, frankly, how we will handle that over a long period of time. However, I certainly respect your decision in this matter and I share some of your concerns about the tax-inclusive pricing.
Having said all that, I think this is a very positive move for our province. It will be very beneficial not only for the business sector, which is quite apparent, but also for consumers. I hope in the end you will see fit it support this bill.
The Chairman: Senators, we have two walk-ons; Mr. Leonard Barron and Mr. Carl Powell.
Mr. Leonard Barron: Mr. Chairman, I came down partly because I was interested in meeting the people who govern the country. As I listened, I thought that I should make a presentation to you because I do sincerely believe that the tax should not be included in the price. The justification for this is based on a poll that was taken. Perhaps you should check the poll to what questions were asked and what group was targeted. As you know, it is very important to know how the question was structured.
In a democracy, I believe that people should know what their taxes are at any time. If the tax is open, people will accept it more easily than if it is hidden. This is why we accept income tax rates. We complain about them a lot, but they are open and we know exactly what we are paying. We know the cost of government.
I would like to bring to your attention the history of the manufacturers' sales tax. It came in I believe shortly after Confederation, around the 1870s, but then the various pressure groups worked on it and they forced various adjustments until it became inoperable and, therefore, we went to the GST. It is important that the tax be open so that pressure groups cannot change it, as they probably will try to do in the next few years.
People should know what the tax is. I have worked in various parts of the world and I have come across many people of various educational levels. I can assure, Mr. Chairman, that there is not much difference in the intelligence of people anywhere in the world. People are smart and they know what the taxes are. They might not know it to the nearest cent, but they will get to the nearest 10 cents.
I am against integrating the tax into the price. I think it should be separate.
Mr. Carl Powell:I am a retired mining engineer. I worked in Canada, the United States and South America. I would like to talk about Voisy Bay and why we have such a problem in this province with our resources. If we do not know what we are doing, and we have nothing to tax there will be no tax revenue. Mr. Sullivan said he does not see a bright tomorrow. I do not see it either, but I would like to give you a little background on the problem, as I see it.
In 1994 I was closely associated with people who were working on Voisy Bay and I could not believe what was coming out of there. There was also Falconbridge and Diamond Fields which has become Inco. We have a mine and a mill in Voisy Bay, Labrador, and we will have a smelter at Argentia. Before Mr. Wells left government, he introduced Bill 43, to amend the Mining Taxation Act. I am quite familiar with the Mining Taxation Act, the Safety of Mines Workmen Act, the Environmental Act and all the regulations. There is nothing in there that will take care of the technology that will come into this province to process nickel, copper and cobalt. There are also environmental issues that must be considered.
At one point Falconbridge said they would export the ore and not refine or mill it in the province. We would be worse off than Third World countries. When they decided to build the smelter, where it should be located, they made a list of criteria. People in the mining industry like myself, and other types of engineers like Mr. Barron, began to wonder about this criteria. I just finished reading the Fourth Symposium on Mining in the Arctic. There have been four of them since the 1960s, with the People's Republic of China, the Soviet Union, now Russia, Finland, Denmark, Sweden and Norway, Canada, the Unites States, and not one mine, not one concentrate and not one smelter in any of those countries in four symposiums over some 30 years has ever adopted the criteria that Inco applied to this province. I am very suspicious if a company comes in and says we must have an ice-free port when it does not apply to anywhere in the Arctic. As well, no other company has ever said that there must be a previous industrial exposed infrastructure.
This smelter causes me to have serious environmental concerns. It is in the wrong place. The federal Department of Environment knows what will happen when the winds come out of the southwest with the sulphur loading now in this Avalon Peninsula near full loading. We have no hydro power on the island, so there is a rush now to dam prime salmon rivers and put in thermal plants which will further add to the carbon dioxide which causes global warming. Canada will be a prime offender by the year 2000 if they do not stop now. We will go over the nitrous oxide limits and we will go over the sulphur dioxide limits.
There is copper coming out of Voisy Bay, we have a copper concentrator, a copper smelter but the copper refinery will go to Quebec. It will go to Noranda. They are expanding for it now.
How can we tax something if we do not know what we have? That is the point, and this is the history of this province. Probably other people can speak to the forestry, and to the hydro. It destroys the last vestige we ever had of developing the lower Churchill. That does not need to go in in one lump. There are many rivers in Labrador.
We will never have the Trans-Canada Highway running through Labrador, we will never have a tunnel built under the strait. They will not even bring hydro power into the mine and mill, they will put it in turbines that will burn more fuel and put more carbon dioxide and more sulphur dioxide into the air.
This province has some very difficult issues to deal with.
The Chairman: Senators, that completes our hearings in Newfoundland. We will adjourn until one o'clock tomorrow afternoon in Halifax.
The committee adjourned.