Consumption taxation is making the news again in Canada. Manitoba’s PST hike to 8 percent that was announced in April’s provincial budget kicked in on July 1At the public hearings into the increases and in the media, the increase has received a lot of criticism despite the claim the increase will be temporary and used to fund infrastructure.is temporary all these years after the temporary imposition of income taxes during World War One. Meanwhile, Colin Busby and Alexandre Laurin at the CD Howe Institute have just put out an e-brief proposing that Alberta introduce an 8 percent HST and lower its personal income tax rate to 8 percent – a move they say would be revenue neutral.Such a switch would lead to greater saving, investment and less volatile government revenues – a constant issue in boom bust Alberta.

Yet, consumption taxes are not popular with the public especially at the provincial level, which explains the popularity of the federal GST rate decrease despite chiding from economists and economic opinion leaders like columnists at the Globe and Mail. Why? Goods and services taxes are already a large share of total tax revenue at the provincial level. Since the early 1990s, they have tended to fluctuate between 35 and 40 percent of provincial territorial tax revenue. However, around 2002 they peaked at nearly 43 percent and then declined. But since 2007 have risen from 35 percent to just below 40 percent. At the federal level, on the other hand their share of total tax revenue has gone down from just under 30 percent during the early 1990s to about 20 percent. (see Figure) Naturally, the share varies quite a bit across the provinces but that data was a bit harder for me to get consistently over the 1991 to 2013 period during the current transition from the FMS to GFS statistics.







Consumption taxes are visible and the public has seen them going down at the federal level. One could make the argument that shifting a larger share of federal tax revenues to income taxation (the more inter-provincially mobile tax base) and provincial tax revenues to consumption taxation (the less inter-provincially mobile tax base) is good fiscal federalism. However, it was more likely short-term opportunism and populism rather than fiscal federalism theory that drove the federal move to lower the GST rate. Yet the federal example of lowering its consumption tax rate is in some sense perversely complicating what would be good policy at a fiscal federal level – more reliance on consumption taxation at the provincial level compensating with lower income tax rates. That is, the CD Howe proposal applied not just to Alberta but also the other provinces. Indeed, the case was made (I think in Boadway, Robin (1992) The Constitutional Division of Powers: An Economic Perspective, Economic Council of Canada) that Ottawa might want to just rely on income taxation while the provinces get out of income taxation completely and just rely on consumption taxation. Given public rancor over things like a PST increase, we probably are not there yet.