Ontario’s budget—another opportunity to lower province’s high income tax rate

On March 23, the Ford government will table its next budget and will have yet another opportunity to make good on past promises to lower taxes on Ontarians and correct some policy mistakes of the recent past.

For example, in the early 2010s, Dalton McGuinty’s government raised Ontario’s top personal income tax rate by more than three percentage points. This increase was sold as a temporary measure but remains in place a full decade later. In 2016, the Trudeau government raised the top federal personal income tax rate by four percentage points. Due to the combined effect of these tax hikes, Ontario’s top income tax rate increased from 46.41 per cent in 2011 to 53.53 per cent today.

To understand the effect of this change, consider this. In 2010, before the provincial and federal tax increases, to increase their take-home pay by $100, Ontarians facing the top marginal tax rate had to earn an additional $187 compared to $215 today.

So why should all Ontarians—not just the “rich”—care?

Because such high tax rates reduce the incentives for additional productive economic activity. This undermines long-term economic growth in the province, which affects everyone. And high tax rates make it harder for Ontario to attract mobile high-skilled workers (including entrepreneurs and businessowners who create jobs, and doctors) with lots of choices about where to live. At 53.53 per cent, Ontario has the third-highest top personal income tax rate in Canada and the United States.

Of course, taxes aren’t the only factor that determine where people choose to live, but for high-earning individuals who see a large share of their income subjected to that rate, such a high tax rate makes Ontario less attractive than it would otherwise be compared to nearby U.S. states with much lower tax rates. When you combine Ontario’s tax structure with the sky-high cost of housing in and around the Greater Toronto Area, it’s not hard to see why many companies find it hard to attract high-skilled workers.

Finally, it’s not even clear that such high tax rates achieve their goal of generating substantial new government revenue because, again, high tax rates reduce incentives for production and dampen economic growth, which shrinks the size of the underlying tax base and undermines the goal of raising more revenue. Indeed, a growing body of evidence suggests recent provincial and federal tax increases in Canada aren’t actually producing much more money for governments. In other words, it’s economic pain for little if any gain.

Raising taxes on high-income earners may be politically attractive to some people, but it hurts the economy and interferes with our ability to attract mobile high-skilled workers. In its upcoming budget, it’s long past time for the Ford government to reverse course on this misguided policy approach and start lowering taxes on Ontarians including those in the top income tax bracket.