Most of the discussion surrounding Ontario's debt and deficit problems – both among the politicians and in a report from the Fraser Institute economic think tank this week – tends to focus on bringing spending under control. It's understandably politically unpalatable to raise the notion of tax increases. Yet ignoring the revenue side of the equation dismisses considerable potential for a long-term solution to the structural problems in the province's finances.
Ontario's government revenue-to-GDP ratio of just under 17 per cent is one of the lowest among Canadian provinces (only Saskatchewan and Alberta, with their booming GDP growth in recent years, are lower). Its general corporate tax rate of 11.5 per cent (cut from 14 per cent by the McGuinty Liberal government, and targeted to eventually be dropped to 10 per cent) is among the country's lowest. Ontario also has some of the lowest personal income tax rates in the country.
So certainly there is scope to increase taxes, in some form, to address the province's $11.7-billion budget deficit and address its ballooning debt, which has doubled to more than $270-billion over the past decade. Yet the province's three political parties seem to have little appetite to talk about tax increases.
The mandate of the Drummond Report, commissioned by the ruling Liberals two years ago to make recommendations on how to address Ontario's structural financial problems, specifically precluded it from recommending any tax increases. The idea is a non-starter for the opposition Progressive Conservatives, who continue to push for further corporate tax cuts. Even the NDP, which used to talk about "restoring" the corporate tax rate to its pre-McGuinty-cut level, is now advocating small-business corporate tax cuts in exchange for a higher minimum wage.
California, a recent government-deficit basket case to which Ontario is compared in the Fraser Institute's report, had a different view. It concluded that no meaningful structural change in the state's dysfunctional finances could be achieved without an increase in revenues being a significant part of the solution – and raised personal income taxes. Indeed, California voters even approved the tax hike, recognizing the seriousness of the state's financial plight.
There's no guarantee that taxpayers in Ontario would be so understanding, But tax hikes are problematic beyond the issue of how to sell them to voters without committing political suicide.
As the Fraser Institute report points out, tax increases take money out of the hands of consumers and businesses, which can reduce spending on consumption and investment – and thus is a potential drag on the province's economy. Slower economic growth translates into slower tax-revenue growth. So tax increases can be, at least to some degree, self-defeating.
But that could be said of taxation in general – and, given the need for governments to provide services, does not in itself outweigh the need to collect enough taxes to adequately pay for them. Given Ontario's relatively modest tax take and its improving economic outlook (forecasters see GDP growth accelerating from 1.4 per cent last year to about 2.5 per cent this year, and close to 3 per cent next year), the province does have scope to at least consider tax increases as part of its long-term financial solution. To keep them off the table completely defies common sense and shirks the responsibilities of fiscal leadership. Shielding voters from unpopular realities is not the right answer.