IDA calls on Ontario to cut taxes

(February 15, 2005) Ontario should reduce both corporate and personal income tax rates in an effort to make the province more competitive and attract new private investment, the IDA says in a pre-budget submission.

“While we are encouraged by an optimistic near-term outlook for the Ontario economy, we continue to have concerns about the province’s tax competitiveness and its impact on the economy,” the brokerage industry association says.

According to the C.D. Howe Institute, Ontario has the country’s third highest effective tax rate on capital investment — nearly 33%, trailing only Saskatchewan (37%) and Manitoba (35%). By comparison, B.C.’s effective tax rate is 29% while Alberta’s is just 24%.

The IDA says there is an “urgent” need for Ontario to begin easing the tax burden for businesses in the province. “We recommend reverting to a previous schedule of lowering the general corporate and manufacturing income tax rates to 8% over a period of three years,” the IDA said, in addition to reducing the tax rate on small businesses to 4% from 5.5% over two years. Ontario has already announced a plan to eliminate the capital tax, but the IDA recommends that be accelerated from the January 2009 start date.

On personal taxes, the IDA recommends reduced rates on low-income earners to 5.65% (from 6.05%) and 8.85% (from 9.15%) on middle-income earners. Ontario should also eliminate the 20% surtax on income above a certain threshold and consider abolishing such surtaxes entirely.

However, it’s unclear if the IDA will get its tax wishes. The current Ontario government’s recent history leans towards tax hikes, as opposed to cuts. In last year’s budget, Ontario backed down on a pledge not to increase taxes, by introducing an annual health premium. Premier Dalton McGuinty has said the province won’t raise taxes this year, even if economic growth stalls.

Ontario should also stick to its target of eliminating the provincial deficit by fiscal 2007-2008 by ensuring that annual increases in program spending are kept below revenue growth, the IDA recommends.

“Keeping a tight rein on spending crucial to meeting the deficit elimination target,” the IDA says. The government is holding public consultations on the budget, expected in the spring.

Filed by Doug Watt, Advisor.ca, doug.watt@advisor.rogers.com