My campaign promise to rescue Toronto's declining suburbs by stimulating new investment with commercial property-tax cuts is catching fire. Now both leading fringe candidates, Jane Pitfield and Stephen LeDrew, are promising to do the same thing.
The big difference between my plan and theirs is that mine isn't magic. Rather than gambling billions of dollars of revenue on a nice theory -- that tax cuts will stimulate enough new investment to replace the lost revenue -- I am responsibly proposing an insurance scheme in the form of temporary road tolls or a city sales tax to make up the difference until the property-tax cuts bite.
Unfortunately for my sputtering campaign, people prefer magic. So I am changing my tack. It might be that magic is not so irrational as it might seem, especially in light of the historical evidence. It turns out that the last time business taxes went down in Toronto -- between 1998 and 2000 -- both employment and the value of commercial property soared.
Magic or no, that event is worth noting. It was a classic experiment that produced spectacular results.
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The setting was the Harris government's decision to take over local school boards and, in the process, redirect the taxes that supported them into provincial coffers.
That required it to set uniform tax rates to replace the highly varying rates charged previously by individual boards. But it only managed to do so for residents. Businesses were left to pay the new provincial tax at the old rates, with Toronto businesses paying the highest rates of all. The province cut spending on education in Toronto by $300-million a year without cutting the business tax rate accordingly.
Even Ernie Eves and Mike Harris knew that wasn't fair, so the finance minister instituted a program to reduce Toronto's business-education tax rate to a reasonable level over a period of five years. Unfortunately he cancelled the phase-in two years later, and the McGuinty government, crying poor, has failed to bring it back. The result is that today, the excess provincial take is a major component of the "tax gap" that is driving investment out of town.
But something quite astonishing happened when taxes did fall. Between 1998 and 2000, a period when assessments were frozen, the Business Education Tax rate in Toronto fell about 10 per cent -- equivalent to a 5-per-cent cut in overall business taxes. But when Ontario properties were revalued in 2001, it turned out that commercial assessments in Toronto had increased by about 40 per cent.
By comparison, commercial assessments in the rest of Ontario, without the benefit of steep BET cuts, only increased 14 per cent over the same time period.
Even if the Toronto tax cuts were responsible only for a fraction of the huge gain in property values, they were self-financing -- just as supply-side theory predicts.
Over the same two-year period, Toronto gained an impressive 100,000 new jobs -- the sharpest growth in employment since the mid-1980s. Was that a coincidence? I don't think so. Nor does coincidence seem to explain why employment immediately levelled off and began to decline when the tax cuts stopped.
If nothing else, experience with the late-nineties tax cuts is another powerful argument for the provincial government to start equalizing BET rates once again. Not only is the existing regime deeply unfair by any standard, there is strong evidence that fixing it will ultimately cost the provincial treasury much less than previously imagined.
Besides, it can afford the gamble. If the McGuinty government is prepared to forgo $1.5-billion of revenue by eliminating the obscure capital assets tax -- a Tory initiative the Liberals adopted enthusiastically, despite the premier's election promise not to cut taxes -- it can afford to do the same with the BET. At most, the cost of equalizing BET rates will be half that -- and the benefits, especially in Toronto, could be spectacular.
If the magic holds, we can then keep cutting till there is no tax gap at all, the jobs come flooding back into town and the coffers overflow.
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