Proposed HST cut not best option for tax relief in Nova Scotia

With rumours swirling of a pending election call, the Houston government has announced what could become a key campaign promise—reducing Nova Scotia’s Harmonized Sales Tax (HST) from 15 per cent to 14 per cent. But while Nova Scotians surely need tax relief, an HST cut is not the best option.

Nova Scotians are among the most heavily-taxed people in North America across different types of taxation. For personal income taxes, Nova Scotians face either the highest or second-highest tax rates among 61 jurisdictions in North America across all different levels of income. Business taxes in the province are tied for third-highest in Canada for both small and large businesses. And yes, Nova Scotia’s current sales tax rate is tied for the highest in Canada.

It’s no surprise that the number one ask from Nova Scotians in last year’s pre-budget consultations was tax relief.

So, what’s the problem with an HST cut? Simply put, not all taxes are created equal.

Nova Scota’s HST applies to goods and services (although the tax does not apply to most categories of groceries, for example). Consumption taxes such as the HST generally encourage saving and investment, and do not distort decisions to work, invest or start a business to the same degree as other forms of taxation. As a result, consumption taxes are generally the most efficient way for governments to raise revenue.

Conversely, a high reliance on personal income and business taxes (like we see in Nova Scotia) damages the economy because these taxes tend to reduce economic growth. For example, according to recent research, personal income taxes are 80 per cent more costly (in terms of reduced economic growth) than sales taxes. And business income taxes are 59 per cent more costly. In other words, the Houston government could generate much more economic benefits by cutting taxes on personal income and/or businesses.

And economic growth should be a major concern. According to a recent study, in 2022 (the latest year of comparable data) Nova Scotians reported the third-lowest median employment earnings among all 10 Canadian provinces and 50 U.S. states. Moreover, since 2010 median earnings growth in the province was fourth-lowest. Consequently, Nova Scotians are earning less than 99 per cent of the other residents across Canada and the United States.

While there’s no single silver-bullet policy to improve growth and incomes in the province, reducing burdensome personal income taxes and/or business taxes would help. Nova Scotia needs a stronger business sector, more investment, more entrepreneurship and a greater ability to attract and retain top talent (including health-care professionals).

Unfortunately, reducing the HST helps with none of these goals. With a possible fall election looming, Nova Scotians should demand better targeted tax relief from the Houston government or its would-be replacement.