OTTAWA — The Canada Day cut in the Goods and Services Tax could actually lead to consumers paying more for hard liquor, a tax watchdog warns.

Over the course of the summer, the cost of a bottle of spirits is likely to cost more thanks to a federal tax hike associated with the new six-per-cent GST, says John Williamson of the Canadian Taxpayers Federation.

"For a government that's trying to present itself as a friend to taxpayers, this is a bad idea," Williamson said. "Because they tried to get cute with spirits, the tax on spirits is going to go up."

As part of their election platform, the Conservatives promised to cut a percentage point off the GST.

But the government's May 2 budget raised excise taxes on tobacco and alcohol in what it called a revenue neutral exercise to maintain so-called "sin taxes" at existing levels.

"Budget 2006 proposes to increase alcohol excise duties to offset the impact of the GST rate reduction," said the budget document.

That's where things get tricky.

The tax on beer and wine is to be charged on a flat, per litre basis at the source, meaning the same tax rate applies to premium-priced ale as buck-a-beer lager.

But the excise tax on hard liquor is based on the retail price per bottle. And since provincial excise taxes - Alberta excepted - are set as a percentage of the federal excise tax, the provinces get a windfall.

Williamson estimated the sin-tax increase on liquor could net provinces an additional $50 to $70 million annually. He estimates that on the average 750-millilitre bottle of booze, a consumer will pay an extra 30 cents.

"It makes no sense for government to cut (the GST) on one hand and just reach into consumers' pockets to get it right back," said Williamson.

All liquor distilled before Canada Day will not be subject to the higher sin tax.

Spirits Canada President Jan Westcott said most liquor stores and distillers have enough inventory of distilled product that liquor prices won't rise for at least two months.

He said his goal is to make sure the sin tax hike will end up being revenue neutral.

"We're talking with liquor boards and we're getting encouraging signs," said Westcott.

"I think there is an argument to be made that beer, wine and spirits should be treated the same way."

When the budget was introduced, there were excise tax breaks aimed at small and mid-size brewers and vintners.

But earlier this week, Finance Minister Jim Flaherty expanded the tax relief to include all brewers and Canadian wine makers, for a total break of as much as $28 million annually.

Distillers will not receive the same relief.

Westcott said the government runs the risk of "distorting" the marketplace by giving tax breaks to breweries and winemakers and not distillers.

He said many breweries will take advantage of this tax break by rolling out more dollar-a-beer products, which will pressure smaller businesses who have smaller profit margins.

Since the country's largest breweries, Molson and Labatt, are no longer Canadian-owned, Westcott said governments can no longer argue that they're protecting Canadian companies with these types of tax breaks.

The same holds true in the wine industry, he said, since wineries like Vincor, which was recently purchased by American winery Constellation, are becoming part of larger foreign companies.

"It's fairly typical behaviour to advantage the local guys," Westcott said. "But those old silos are breaking down."