Ontario needs tax reform

TheGlobeandMail.com – Opinion/commentary – Ontario needs tax reform
August 13, 2008. GLEN HODGSON, Conference Board of Canada

Ontario’s economy has been rocked by the combined effects of a strong dollar, structural change to the auto industry, the U.S. economic slowdown, high energy prices and global restructuring. How can the province’s industry renew itself in this difficult situation? A key part of the answer is business tax reform in four priority areas.

At the top of the list is the harmonization of provincial sales tax with the federal goods and services tax – a change that has already been implemented by Quebec and most of the Atlantic provinces.

Under a harmonized system, only the value added by Ontario businesses would be taxed, thereby reducing business costs and providing a boost to investment and productivity. This change would reduce sales tax revenues, and the province would require offsetting assistance from the federal government over a significant transition period. In the medium term, new investment would help to generate more business activity, hence more government revenue.

Harmonized consumption taxes could also permit greater alignment in social policy, by way of consumption tax credits at the provincial level for low-income taxpayers, replacing select sales tax exemptions.

Second, Ontario’s plans to eliminate capital taxes on all firms by 2010 should be accelerated. Capital taxes penalize investment in capital equipment by raising the required rate of return on investment. Moreover, they are levied without regard to a firm’s profitability at the time of taxation, which places undue stress on firms already under financial pressure. Ottawa has already eliminated capital taxes, and Ontario announced this spring it was eliminating capital taxes on manufacturing and resource sectors retroactive to January, 2007.

Third, there is a strong case for Ontario to lower its corporate income tax rates to make them more competitive internationally. The federal government has announced a five-year plan to accelerate the reduction in the general federal corporate income tax rate to 15 per cent. The first step was a reduction to 19.5 per cent in 2008, including elimination of the corporate surtax. The provincial and federal governments should also give Ontario’s small businesses some relief from tax-based barriers to growth, such as the large step increase (at net business income of only $400,000) in federal corporate income tax rates for small businesses.

Finally, a new green tax that puts a price on carbon dioxide emissions could generate billions of dollars every year. This new revenue would fund our recommended tax cuts while supporting needed public investments in areas such as transportation infrastructure and human capital development. At the same time, introducing an environmental investment tax credit would encourage business to adopt new, greener technologies.

We do not advise further exceptional tax relief through temporary accelerated capital cost allowances, such as those already put in place by the Ontario and federal governments. Certainly, investment in new machinery and equipment is critical if Ontario businesses are to adjust to the strong dollar and U.S. slowdown. However, the Conference Board’s analysis suggests that ongoing new machinery and equipment investment problems are heavily concentrated in the auto sector, which is going through a wrenching time of restructuring.

Yet, other sectors are showing welcome resiliency. A strong dollar means that new technology can be imported at highly competitive prices. In our view, the accelerated capital cost allowances should be allowed to lapse at the end of the planned period. Any exceptional federal and Ontario government assistance should be targeted to the particular circumstances of the sector facing difficulty, and not applied as a broad-strokes solution.

Glen Hodgson is senior vice-president and chief economist, the Conference Board of Canada

The Conference Board’s briefings on tax reform are available at http://www.e-library.ca.

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