Ontaxario!

The leaks are out and they are ugly. Portions of the Ontario provincial budget appeared in Toronto media over the weekend and a big tax increase is on its way. Not only are new taxes not needed to reduce the deficit --spending pressures are the real deficit driver -- but their imposition will only hamper the economy’s capacity to actually achieve that end.

Since the leaks are likely accurate that Premier Dalton McGuinty’s first budget will include a new health tax, it may well be the tipping point for a government already notorious for breaking promises. A health tax would break a very high-profile campaign pledge not to introduce or increase taxes, given to the electorate through the Canadian Taxpayers Federation only eight months ago. Even worse, it constitutes a direct tax on families and subverts an explicit election promise not to raise personal income taxes.

The government is introducing the tax -- misleadingly labelled as a health premium -- under cover of the public health financing crisis. But instead of using the money to fund existing programs, the McGuinty government has pledged to expand the system in areas as diverse as public health, long-term care, home care, primary care and hospitals. A deficit reduction tax should be applied against current spending, not used to inflate publicly delivered health spending and introduce new programs.

The cynical manipulation of public concerns over health care access to justify a revenue grab has a history in Ontario. The province had health premiums assessed on individuals and families from 1959 to 1990. They were replaced by an Employer Health Tax on Jan. 1 of the latter year. The conversion was billed by the Liberal government of the day as a tax cut for people, even though two-thirds of the health premiums had been paid by employers as an employee benefit.

In contrast to this rhetoric, the government actually raised taxes significantly, boosting revenues from $1.7-billion under the old health premium regime to $2.7-billion in the first year of the new tax, according to the provincial auditor. The Employer Health Tax is now estimated to take in $3.7-billion annually, even after a partial tax cut brought in by the Mike Harris Conservatives in 1997.

History is now repeating itself with the new Liberal government, even in the person of present Finance Minister Greg Sorbara, who served in both Cabinets. Once again, rhetorical misdirection is being used to raise taxes. Only this time it is not a replacement of one tax for a more expensive version, but rather a case of double taxation, in the sense that an old tax will be revived without replacing the existing tax originally introduced to remove the old tax.

To see how this works, note that the premiums collected in the year prior to the tax change in 1990 accounted for just under 12% of the province’s health expenditures of $16-billion. Moving ahead 14 years, today’s Employer Health Tax brings in just over 12% of the $29-billion health budget.

The taxes notionally allotted to health care have thus completely kept pace with the growing budget in that area. There is no need for a new tax tied to health care, especially since the funds likely will be pooled with general revenues and have only a tenuous link to the health budget. Ontario will now have two health taxes: the Employer Health Tax and the new health premium.

It is also inaccurate to talk about premiums when there is no insurance involved. The Ontario health system covers the first dollar of expenditures, has no cost-sharing component, does not employ deductibles, is not risk rated and is not run as an insurance fund, with reserves and professional benefits management. When a social benefit is not insurance, it distorts the public policy discussion to label taxes as premiums.

Ontario does not need higher taxes. Tax Freedom Day, the moment that the average taxpayer stops working for the state, falls on June 26. This half-year tax burden is the third-highest in Canada and only slightly below the all-time highest level set in the 1990s. Ontario, home to more than 40% of Canada’s economic capacity, is taking the dubious risk of moving to the top of the Canadian tax league. That way leads to reduced economic vibrancy and an erosion of the tax base that supports government revenues.

The multi-billion-dollar deficit does have to be tackled but the focus should be placed on cutting spending, not raising revenues. Provincial spending after adjustment for population growth and inflation is at an all-time high. The deficit was also created primarily by outsized spending increases in the past two years, after six years of relative spending restraint, tax cuts and deficit elimination. Health is the most important component of this leap in spending. But experience shows that true fiscally sustainable structural reforms can only take place when the flow of tax dollars is reduced.

The new taxes are unnecessary. They will hamper the economy at a time when deficit reduction depends on growth. They take the focus off out-of-control spending that is at the heart of the fiscal imbalance and they will postpone needed health reforms. This ultimate broken promise shows that the government just will not keep its commitments. There is only one explanation for this behavior: taxophilia.