Ontario has scrapped its staycation summer, delaying a $150-million tourism tax credit that was supposed to spur provincial residents to splurge on local vacations this year.
The credit was first announced in late 2020 and promoted again in the spring budget, with the idea of rolling it out in the summer of 2021. But a third wave of coronavirus infections derailed that plan, with the government concluding earlier this month it didn’t make sense to launch a tourism push while public-health restrictions pulled in the other direction.
So far, the government hasn’t said much about how the credit will work, other than it will refund 20 per cent of up to $1,000 in eligible tourism expenditures. What kinds of expenses would qualify have yet to be defined, although one possibility is to limit qualifying outlays to accommodation. Such an approach would give Ontarians an incentive to travel, and indirectly boost spending on meals and other associated travel expenses.
But there are a number of other design questions that the government has yet to address, including whether the credit will apply to individuals or households, and whether it will be refundable – meaning it would be paid even if a person did not owe any provincial income taxes.
The Ontario government first floated the credit in its 2020 budget last November, saying the travel incentive would encourage Ontarians “to safely discover Ontario in 2021, the year of the Ontario staycation.” That assertive tone had softened by the time of the 2021 budget in March, with the government noting it would enact the tax credit “when public health experts advise that it is safe to travel.”
With public-health restrictions still in place in many parts of the province in June, the government decided to defer the launch of the credit until 2022.
The head of Ontario’s tourism industry group said the tax credit is an important pillar of support for recovery, estimating the sector has lost 130,000 to 140,000 out of 500,000 prepandemic jobs. “This has been a pretty catastrophic 16 months for the tourism industry,” said Christopher Bloore, president and chief executive officer at the Tourism Industry Association of Ontario.
There will be fierce competition with other jurisdictions for travel dollars once the pandemic ends, Mr. Bloore said. He praised the idea of the tax credit, saying it will encourage Ontarians to travel within the province and allow tourism operators – burdened by debt – to avoid slashing prices.
While the tax credit is a key tool for Ontario businesses in the competition for tourism dollars, Mr. Bloore said, more will need to be done. Earlier this month, a government-commissioned report raised the idea of a provincially sponsored rewards card that would provide discounts.
The government is also providing direct support to tourism businesses, with $100-million in small-business grants and $100-million in funding for larger tourism operations.
Rick Robertson, professor emeritus of accounting and finance at Western University’s Ivey Business School, said it would be more effective to increase the budgets of such kinds of direct support rather than spend $150-million on a tax credit for individuals.
Such boutique tax measures are typically ineffective in changing behaviour, he said. In order to do so, the incentive would need to be large. Research and development credits are a rare exception to the rule, Prof. Robertson said, precisely because they’re so lucrative. By contrast, he said, the tourism tax credit would at most deliver a $200 benefit.
Niels Veldhuis, president of the Fraser Institute, said one of the main critiques of boutique tax credits is they subsidize behaviour and purchasing decisions that would have occurred in any case. That’s particularly true for Ontario’s tourism tax credit, Mr. Veldhuis said, given there are widespread predictions of pent-up demand driving a surge in consumer spending once pandemic restrictions ease. Ontario would have been better off simply not spending the money, he said.
Timing is another issue. Ontario residents would receive the credit when filing income taxes, meaning it wouldn’t be paid until early 2023. That delay weakens the incentive power of the tax.
Lastly, there are design questions to be addressed that will tilt the credit’s benefit in one direction or another. Will the credit be apportioned on an individual or household basis? Taxes are filed individually, but setting eligibility on that basis would allow two-income households to double up on the credit. But Prof. Robertson noted it could be tricky to determine who was or was not part of a household.
A refundable tax credit would broaden the measure’s reach by allowing people who didn’t owe provincial taxes to still claim a rebate. Prof. Robertson said a non-refundable credit would be easier to exploit, however, by allowing wealthier families to have older or adult children claim the credit.
If the tax credit is to go ahead, visibility will be key to its success, Prof. Robertson noted. If Ontarians aren’t aware of the credit, it won’t be of much use. “Without marketing, it won’t work,” he said. “With marketing, it may help.”
Tax and Spend examines the intricacies and oddities of taxation and government spending.
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