A value-added tax and state and local governments: lessons from Canada.

• Author: Spain, Cathy

Recently there has been increased interest in the United States in consumption taxation. Among the reasons for discussions of this revenue option are the potential additional revenues a new consumption tax could produce for deficit reduction purposes and the possibility of using a value-added tax (VAT), one form of consumption tax, to pay for health care reform. During the GFOA annual conference in Vancouver, B.C., the Committee on Governmental Debt and Fiscal Policy addressed this timely issue by inviting Hugh Creighton, deputy director of finance for Vancouver, to discuss the Canadian experience with a consumption tax and, in particular, the tax treatment of local governments under the Canadian Goods and Services Tax (GST).

To start, it should be clarified that consumption taxes take many forms. This broad category includes not only value-added taxes but also retail sales taxes, specific commodity or excise taxes, business transfer taxes and the much-maligned Btu energy tax proposed by President Clinton but dropped in favor of an increase in the transportation fuels tax in the final version of the Omnibus Budget Reconciliation Act of 1993 (P.L. 103-66). In general, consumption taxes are levied on a taxpayer's expenditures for goods and services rather than on total income.

During the 1993 annual conference, GFOA members clarified and updated GFOA's public policy position on consumption taxes. The membership supported the exemption of state and local governments from federal consumption taxes. This position reaffirms the GFOA's long-standing support for intergovernmental tax immunity.

While many of the members of the GFOA Committee on Governmental Debt and Fiscal Policy did not think the adoption of a value-added tax was imminent, they did agree that GFOA should continue to study the issue. This article provides a brief overview of value-added taxation and the Canadian value-added tax, with special emphasis on Canadian local government experience with the GST.

Types of VATs

To those who have never traveled or lived outside the United States, the VAT concept may seem entirely foreign. In part, what makes this form of taxation so mysterious is the terminology used to describe it. In general, a VAT is a tax on the estimated market value added to a product or material at each stage of its manufacture or distribution. The main differences between the three types of VAT, which are described below, relate to the treatment of capital expenditures...