The implementation of the Harmonized Sales Tax 10 years ago in New Brunswick and two other provinces in Atlantic Canada was a boon for businesses and a mild benefit to consumers, a new report shows.

The report by the C.D. Howe Institute, titled “Lessons in Harmony: What Experience in the Atlantic Provinces Shows About the Benefits of a Harmonized Sales Tax”, explores how melding the provincial and federal sales taxes in the region led to a noticeable increase in capital investment by businesses.

“A kind of a surprising fact about these old provincial (sales) taxes is a lot of them got paid by businesses,” said Michael Smart, author of the study and a tax economist at the University of Toronto.

“It was supposed to be a retail sales tax (RST). Retail means you’re at the cash register at the store, that’s not where businesses do their shopping. Even so, businesses ended up paying that tax.”

Unlike the federal goods and services tax, the former provincial sales tax didn’t have a mechanism in the tax system to provide refunds on the tax back to businesses, said Smart.

“It turned out that those taxes being paid by businesses in the old system were really harmful,” he said.

Smart said there were two reasons.

“When you start building those taxes into business costs they’re going to change business decisions. You’re going to make it harder for businesses to offer a competitive product, either in export markets or domestic markets, because their costs are being artificially inflated,” he said.

“Particularly where we see that is on its impact on investment.”

Smart said that the HST study showed how the old provincial sales tax was also a tax on small capital investments by businesses.

“I don’t mean a new blast furnace was going to pay RST, I mean the hammers and nails that represent a big part of a lot of capital investments were subject to this tax.”

Removing the RST from such smaller capital purchases lead to an increase in capital investment in the three Atlantic provinces – New Brunswick, Nova Scotia and Newfoundland – that adopted the HST in 1997, the study found.

“Investment really jumped in those three provinces compared to what was happening at the same time to investment in the other provinces,” he said.

“The Atlantic provinces have traditionally lagged behind other provinces in terms of investment per dollar of economic activity, basically there was a few years after the reform when that went away and the Atlantic provinces caught up to the others.”

Smart cautioned that the implementation of the HST may not be wholly responsible for the jump in investment.

Developments of offshore oil and gas projects in Nova Scotia and Newfoundland may have played a role as well, he said.

“But even when you take out those effects you still see this very surprising, very sudden boom in investment, especially over a three to five year period after the reform,” he said.

Harmonizing the provincial and federal sales taxes not only benefited businesses, it also benefited consumers, said Smart.

“What we’re trying to explain to people is that at the end of the day it’s never the businesses that pay taxes. The businesses don’t pay taxes, people pay taxes,” he said.

Businesses hit with an RST would build the added cost into their prices, passing the tax on to consumers. When the RST was harmonized with the GST and businesses could get a refund for a portion of the HST, they passed on savings to consumers, said Smart.

According to the study the HST change should have changed business costs by about one per cent in the three Atlantic provinces with the new blended tax.

“That’s exactly what happened,” he said.

Prices in the three provinces fell one per cent compared to other provinces – including Prince Edward Island, the sole holdout in Atlantic Canada – without the HST.

Based on the research he’s done, Smart is recommending the HST model to the other provinces.

Charles Cirtwill, acting president of the Atlantic Institute for Market Studies, said the C.D. Howe study results show the benefits of removing taxes on capital investment.

While New Brunswick hiked business taxes in spring budget, Cirtwill said there was still time for the province to change course and send a positive signal to the business community.

“Certainly, when you start looking at places where you can tweak your tax system to have significant and demonstrable gains for the overall economy, that’s where you should be looking, on this corporate tax side,” he said. “While most people looked at this GST/HST thing as a consumer tax, really its biggest impact was on business and its biggest benefit came to people via that business cycle.”

Cirtwill said one option the province should consider is eliminating corporate income taxes. “It would be very easy for provincial governments simply to eliminate corporate taxes,” he said.

In New Brunswick, corporate income taxes will engender $217 million in revenue for the province in 2007, roughly seven per cent of the province’s own-source revenues of just over $3 billion.

Instead of the McKenna-era message of New Brunswick being open for business, Cirtwill said the province could instead bill itself as the “tax-free zone for business in North America.”

“Just think of the advantages that Alberta has with no sales tax and the competitive advantage New Brunswick would have if they could go to corporations and say ‘we don’t charge you tax, you come here, you do business, you deliver jobs and away you go to the races.'”

For some however, the provincial government’s next tax move shouldn’t be on corporate taxes.

Leanne Hachey, vice-president Atlantic for the Canadian Federation of Independent Business, said the reform her members most want to see is lower personal income taxes.

“There is no such thing as a bad tax reduction when it comes to business, large or small. But again if we’re talking about priority of tax reduction, our members have spoken very clear. The priority should be on personal income taxes, then small business taxes, then fuel taxes.”