Coordinating Federal and Provincial Sales Taxes: Lessons from the Canadian Experience

Abstract

Canada has operated both a federal value-added tax (the GST) and two variants of provincial VATs for the last 15 years. In addition, several provinces have continued to operate retail sales taxes similar to those in most US states. A brief review of experience around the world with "two-level" sales taxes indicates that Canadian experience is the most relevant international experience for the US to consider. We conclude that the Canadian case suggests that the introduction of a federal VAT in the US would not create any great technical problems for either the states or business.

The Impact on Investment of Replacing a Retail Sales Tax by a Value-Added Tax: Evidence from Canadian Experience

“…In a complementary paper (Smart and Bird 2009) we find that in the Canadian case the pattern of relative price changes among broad consumer expenditure categories was quite similar to the pattern of relative changes in taxes and business costs induced by the reform: each one per cent increase in costs induced by taxes leads to approximately a one per cent increase (or perhaps more) in the price paid by consumers. Since these results are consistent with the notion that 6 For further discussion of this point, see Bird, Mintz and Wilson (2006) as well as Bird and Gendron (2007). taxes are fully shifted forward in most sectors, the implication is that the change in statutory burdens associated with the tax reform does not result in large distributional effects. We therefore ignore this issue in the balance of the present paper.…”

“…Input tax credits under the QST were gradually expanded, however, and by 1995 the base of the QST was largely harmonized with the federal GST. Bird, Mintz and Wilson (2006) provide a detailed description of the differences between the two tax bases. Further reform followed in 1997 with the introduction of the Harmonized Sales Tax (HST) in Newfoundland and Labrador, Nova Scotia, and New Brunswick.…”

“…At present, five Canadian provinces operate retail sales tax (RST) systems, which are collected separately and on a very different basis from the federal Goods and Services Tax (GST), a value added tax on consumption; four other provinces, in contrast, levy value added taxes which are largely integrated with the federal GST (Bird, Mintz and Wilson 2006).…”

“…In addition, the phase-in, if anticipated by firms, might have induced them to defer investment rather than increase it -consistent with the pattern displayed in the data. Lastly, many of the capital assets that tend to be taxed under RSTs are still not accorded full input tax credits under the QST either, at least for large firms (Bird, Mintz and Wilson 2006). It may therefore be that the QST lies "in between" a retail sales tax and a value added tax in terms of its effects on the cost of capital.…”

VAT Fraud and Evasion: What Do We Know and What Can Be Done?

“…See, for example, Bird, Mintz and Wilson (2006). argue that a federal VAT could readily co-exist with state level RSTs.…”