Projected harm reveals federal luxury tax’s warped sense of ‘fair’

For people able to afford a vehicle costing more than $100,000, it’s only “fair” they fork up to 10 per cent extra to Ottawa — or so the federal government argues. Yet its plan to slap a luxury tax on vehicles starting Sept. 1 looks more like an attempt to look tough on the rich than the basis of a cohesive policy for tackling wealth inequality.

The tax is designed to skim some added cash from those who can probably afford it.

Let’s face it, there isn’t an exhaustive list of reasons to blow past the $100,000 threshold on a vehicle, let alone the $200,000 or $500,000 marks.

But being able to squeeze buyers for an extra 10 per cent is hardly justification, and Ottawa is leaning on COVID-19 as the rationale. Jessica Eritou, a spokeswoman for Minister of Finance Chrystia Freeland pointed to the “extraordinary amount of public funds” used to pay for pandemic supports.

“It is only right and fair that the very wealthiest are asked to pay their fair share,” she said in an email.

Huw Williams, public affairs director at the Canadian Automobile Dealers Association, has a different idea about what constitutes a “fair” share.

“We already have a very elegant tax system,” he said. In choosing a $100,000 vehicle over one that costs $50,000, the buyer is already doubling the government’s take.

“People who buy more expensive cars pay more, and that’s the way it should work, that’s the way it’s designed to work. Everybody can accept that.”

Buyers aren’t likely to be accepting of the luxury tax. Dealers are already seeing evidence of this through cancelled orders, and a report from the Parliamentary Budget Officer (PBO) forecasts luxury vehicle sales will fall 19 per cent.

Everyday workers, not rich buyers, will shoulder the pain, Williams warned, with both sales and service jobs being lost.

This was the result of a similar luxury tax on boats, planes, jewels, furs and vehicles enacted in the United States in 1990. Small-boat makers were particularly hard hit, with the tax widely blamed for hundreds going under and thousands of layoffs. It was repealed on all items except vehicles in 1993, and phased out for vehicles starting mid-decade.

Boats and planes will also be subject to the Canadian luxury tax, though jewels and furs got a pass. Track-bound race cars; designer handbags; snowmobiles; second, third or 10th homes; all-terrain vehicles; and countless other items that could be considered luxuries without stretching the imagination did too.

There’s also the question of revenue. The luxury tax on vehicles is expected to raise about $125 million a year for government through 2027, PBO estimates show, while costing industry a total of $566 million in sales over the same period. The added revenue for Ottawa is a drop in the bucket for budgets worth more than $400 billion a year, but, and this bears repeating, it means a 19-percent decline in luxury sales.

Staring down a large debt load coming out of the pandemic and facing high wealth inequality compared to historical norms, there are good reasons for Ottawa with explore ways to tax the wealthy more effectively. A luxury tax that ignores all but three products, however, is hardly the “fair” panacea Ottawa is pitching. It will provide negligible help patching up government finances and looks likely to cause real harm to the industries it’s targeting.