Tax reform for Ontario—now, not later

With the Ford government’s first budget just around the corner, Ontario’s burdensome and uncompetitive tax system—which has undermined economic growth for years—should be top of mind for the government. A budget without meaningful tax reform, particularly on personal income taxes, will represent a missed opportunity to improve the province’s prospects for growth and prosperity.

Ontario’s top combined federal/provincial personal income tax rate stands at 53.53 per cent. That means for many skilled professionals, more than half of each additional dollar they earn goes to either the provincial or federal government. It isn’t hard to see how such a high personal income tax discourages work, productivity and investment, all of which Ontario needs more of—not less.

Ontario’s personal income tax system looks even worse in a comparative context. Out of all 60 U.S. states and Canadian provinces, Ontario now has the second-highest top personal income tax rate. In fact, some states with whom we compete for talent don’t have a state income tax, so residents there face only the top U.S. federal income tax rate of 37 per cent. A wide variety of factors influence where people choose to live, but this 16.53 percentage point gap can be a factor that discourages some productive and skilled professionals from choosing Ontario.

It’s also important to remember that when Ontario’s current top tax bracket was implemented in 2012, it was billed as a temporary measure—specifically, the “temporary deficit-fighting high-income tax bracket.” Like so many “temporary” tax hikes, however, this one just won’t go away.

One problem with the continued existence of this “deficit-fighting” tax bracket is that economic research shows tax hikes are not the best way to fight deficits. Research from Harvard economist Alberto Alesina and his co-authors shows that deficit-reduction efforts focused on tax hikes hurt the economy much more than deficit-fighting via spending reductions.

This finding conforms with Canada’s experience during its most successful period of fiscal consolidation, in the 1990s. Back then, the federal government and several provinces closed large budget deficits through fiscal strategies based primarily on spending reductions, and in subsequent years the Canadian economy thrived.

Therefore, policymakers should not point to Ontario’s large deficit today as a reason to delay tax reform that would make Ontario’s personal income tax system more competitive and pro-growth. Clearly, it would be a mistake for the Ford government to deprioritize tax reform, even though tax reform—while working towards a balanced budget—will require more discipline on the spending side of the ledger.

At a bare minimum, the government should remove the “temporary deficit-fighting tax bracket” to signal it understands that higher taxes are not the smart way to fight a deficit. It should also remove income “surtaxes” that complicate the system and undermine transparency while increasing the tax burden and creating harmful incentives. These steps alone won’t be enough to fix Ontario’s personal income tax system, but they would be steps in the right direction.

Fighting the deficit should be a high priority for the Ford government—alongside tax reform to spur economic growth. Achieving both together won’t be easy and will require a strong lasting commitment to spending discipline. The upcoming provincial budget will give Ontarians a clear indication of this government’s priorities.