At least 1.8 million Ontarians will pay more in income taxes
Ontario’s recent budget is jammed packed with new policies ahead of the upcoming provincial election. But what’s missing is any sign that the government wants to improve its uncompetitive personal income tax (PIT) system. In fact, the budget’s proposed changes will make the province’s PIT system less competitive overall, raising taxes on many skilled Ontarian workers at the early stages of their career.
Some of what the budget does on income taxes is for the good—it finally proposes to eliminate antiquated surtaxes levied on top of personal income taxes. The surtax, as the budget admits, is a tax on tax that complicates the personal income tax system and reduces the system’s transparency.
With the surtaxes in place, many Ontarians pay a marginal tax rate higher than the statutory (posted) rate. For instance, the top statutory rate is 13.16 per cent, but after including surtaxes, the actual marginal rate is more than seven percentage points higher—20.53 per cent.
Once the federal tax rate is included, the combined top PIT rate in Ontario is 53.53 per cent—meaning that highly-skilled workers lose more than half of the next dollar they earn to personal income taxes alone (never mind the various other taxes they pay when they invest or consume).
The economic research is clear: high marginal tax rates undermine economic growth. Ontario has the second highest top personal income tax rate in North America, and one of the highest in the developed world, making it more difficult for the province to attract and retain entrepreneurs, business owners, investors and professionals. It’s well pass time for these surtaxes to go.
But that is not the only change the budget will make to personal income taxes in Ontario. Instead of maintaining the top statutory rate of 13.16 per cent, the budget increases the statutory rate to 20.53 per cent, which means the effective marginal tax rate remains the same. This is a lost opportunity for the government to not only rid the PIT system of surtaxes but also to improve its competitiveness. This is particularly poignant in light of the recent tax reforms in the United States that saw the top federal rate decrease from 39.6 per cent to 37 per cent.
Making matters worse, other changes to the statutory rates will result in many Ontarians paying higher income taxes. The budget raises most middle tax rates and adjusts income thresholds so that anyone making more than $71,500 will pay higher taxes, resulting in 1.8 million Ontarians paying more in income taxes (an average of $200 more). Some Ontarians (about 680,000) will see an average tax decrease of $130—but the overall effect is a tax increase of $275 million.
At a time when the Wynne government should respond to competitive pressures from the U.S. by reducing tax rates to improve incentives to live and work in Ontario, the government is doing the opposite and raising personal income taxes on nearly 2 million Ontarians.