Ontario Implements Tax Break

It was perhaps ironic that Ontario's controversial Conservative government could not even cut taxes without sparking an agonized debate. Eleven months after Premier Mike Harris swept to power, he fulfilled a key election promise in last week's budget, introducing the first stages of a 30.

Ontario Implements Tax Break

It was perhaps ironic that Ontario's controversial Conservative government could not even cut taxes without sparking an agonized debate. Eleven months after Premier Mike Harris swept to power, he fulfilled a key election promise in last week's budget, introducing the first stages of a 30.2-per-cent cut in the province's personal income tax rate. But the very prospect of tax relief provoked province-wide, soul-searching discussions about its economic effects and about the wisdom of the spending cuts that were funding it. To the apparent consternation of the Conservatives, suspicious voters were looking their gift horse in the mouth. Judy Hardy, a technician with a Toronto-based medical device company, probably spoke for many voters when she hesitantly praised the notion of a tax break. "It's nice to have a little perk once in a while," she said. Then, she cagily added that she will bank her tax savings: "I just know that we are going to be taxed somewhere else, probably property taxes, to make up for it."

Such guarded reactions from recession-battered, cash-strapped voters did not dent the Tories' obvious pride and faith in their good-news budget. The document's centrepiece - the 30-per-cent tax rate cut over three years - represents the first decline in the province's personal income taxes in 25 years. (In 1971, taxes dropped by three per cent for two years - and then shot back up to the previous rate.) By 1999, Ontario's tax rate is to drop from 58 per cent to 40.5 per cent of basic federal tax - the lowest in Canada. More important, Finance Minister Ernie Eves clearly viewed the cut as the most vital component in the budget's drive to create jobs, encourage investment and reassure debt-strapped families plagued by economic insecurity. "The tax cuts will prove a simple truth: the best job-creation program is a tax cut for every Ontario taxpayer," Eves told the legislature.

That populist conviction is backed by a novel, highly controversial combination of spending cuts, tax relief, continued deficits and a growing debt. In two stages last year, Eves cut $5.4 billion from 1996-1997 spending, slicing deeply into health care, education, social assistance and municipal grants. Experts believe that further cuts will almost certainly be necessary to meet Ontario's deficit targets in future years. Meanwhile, the province's estimated 1996-1997 deficit is $8.2 billion, bringing its accumulated debt to $102.8 billion. Eves calculated that Ontario will not balance its budget until 2000-2001, when its debt will be $117.5 billion. "What people think about this budget depends on their assumptions about the degree to which it will boost the economy, their conceptions of social justice and their feelings about the role and importance of government," said David Perry, senior research associate at the Canadian Tax Foundation in Toronto. "We are in totally uncharted territory."

Whatever the success of Eves's gamble, the budget will almost certainly increase the demand on other provincial governments to cut taxes. Ted Carmichael, head of research at J. P. Morgan Canada, noted that except for Quebec and Ontario, the provinces have drastically cut or eliminated their deficits. As a result, he said, "Politicians will likely find themselves in a position, and under some pressure, to provide relief."

The budget also underlined the growing anger of the so-called "have" provinces - Ontario, Alberta and British Columbia - with Ottawa's decision to provide far more generous transfers to the poorer provinces at their expense. In unusually scathing tones, Eves told the legislature that Ottawa will cut its cash transfers to Ontario for health, education and social assistance by 42.2 per cent between 1995-1996 and 1998-1999 - while it will slice its own program spending by only 1.3 per cent over the same period. "Those are strange priorities for a federal government that purports to be 'fair and compassionate,' " he warned. Such anger will inevitably spill over into upcoming federal-provincial talks on the economy and national unity.

That bitterness was the only sour note in a relentlessly upbeat budget. To charm taxpayers, the cuts will take effect almost immediately: the first 15 per cent will take place in two steps - on July 1 and Jan. 1, 1997. The cuts themselves are progressive, making greater dents in the rates of lower-income taxpayers. When fully implemented, for example, individual taxpayers with incomes below $14,900 will see their rates decline by an average of 41.4 per cent. The break for most taxpayers earning more than $60,000 will be less than 30 per cent - because Eves introduced a so-called Fair Share Health Care Levy as a surtax on higher-income individuals. A working couple with two children and a household income of $60,000 ($35,000 and $25,000) would, for example, save $1,385 when the full cuts are in place.

The budget's good news, however, comes at a price: the tax cuts will cost $1.2 billion in lost revenue in 1996-1997, rising to $4.8 billion when fully implemented. Uneasy critics charged that the cuts to vital services could have been smaller if Eves had kept taxes at the current level. Pollster Jane Armstrong, vice-president of Environics Research Group, said in an interview that eight out of 10 Ontario residents declared in a recent poll that they would forgo a portion of their tax cut to maintain spending on hospitals and education. "Many believe that the cuts are coming too fast and, in some cases, they are too deep and that the targets of cost-cutting such as education are wrong," she said. In response, Eves said that taxpayers can donate their savings to a fund to cut the deficit.

Still, the tax cut became a moral quagmire in which many were torn between self-interest and the greater social good. Said economist Judith Maxwell, president of Canadian Policy Research Networks Inc., which explores the social dimensions of economic change: "Among the Ontarians that I talk to, there is a terrible sense of unease: 'The tax cut would be nice, but do I have to get it on the backs of those who have had their welfare cheques cut?' "

Others were equally convinced that tax cuts were the best tonic for an ailing economy. Eves insisted that the tax break would put extra money in consumers' pockets, allow families to pay off debts, provide more incentive for investors and lure skilled workers to the province. Catherine Swift, president of the Canadian Federation of Independent Business, surveyed Ontario members in mid-February on the proposed cut: out of 2,828 responses, 25 per cent said that it would be a big help to their business, 55 per cent said that it would be some help, and only 20 per cent thought it would be no help. "Our members plan to spend significant portions of the cut on job creation, investment and debt reduction," she said. "I don't remember as much debate about all of the taxes that have been loaded onto us. We Canadians are a masochistic lot."

In the end, of course, the budget's good news must be weighed against the Tories' tough medicine of deep spending cuts and the elimination of 10,600 civil service jobs. University of Toronto economist Tom Wilson noted that spending cuts reduce consumption: laid-off bureaucrats, for example, have less money to make purchases. Tax cuts, in turn, increase consumer demand. On balance, Wilson said, the economic drag of the cutbacks will be more than the stimulus of the tax cuts - because the cuts must also be big enough to reduce the annual deficit. "But all this debate is overblown," said Wilson. "The first stage of the tax cut in July and January simply rolls taxes back to where they were in 1990. Equally, this is not going to be the magic bullet to solve everything." For Ontario's frazzled taxpayers, however, any tax break has become a troubling miracle.

Maclean's May 20, 1996