'High tax' California much more attractive to entrepreneurs than Ontario
The Ford government will deliver its first budget April 11. It’s crucial for policymakers at Queen’s Park to realize just how uncompetitive the province is on tax rates, particularly when compared to U.S. states. For example, while California is notorious for being a “high tax” jurisdiction, the Golden State is actually far more attractive to entrepreneurs than Ontario.
A recent Fraser Institute study documented just how large and serious the tax-gap is between Ontario and its competitors. At the federal level, the Liberal government’s income tax hikes took effect in 2016 with the top personal income tax bracket jumping from 29 per cent to 33 per cent (which now applies to incomes over $205,842). Meanwhile, the Trump administration pushed through significant corporate and personal income tax reductions.
At the provincial level, from 2012 to 2014, Ontario increased its top rate from 17.41 per cent (which includes surtaxes) to 20.53 per cent, which currently applies to incomes above $220,000.
The upshot of these changes is that, from 2009 to 2018, the combined federal-provincial top personal income tax rate increased 7.1 percentage points in Ontario. This combined tax bite makes Ontario far less welcoming to productive individuals and investors than even high-tax California, a disparity that only exacerbates the state’s advantages in climate and location.
To fully appreciate just how uncompetitive Ontario’s total personal income tax burden is, consider Ontario’s standing among its provincial and U.S. peers. Out of 61 total jurisdictions (the 10 provinces, 50 states and Washington, D.C.), Ontario has the second-highest combined tax burden with a top rate—the one applied to the most productive entrepreneurs, business owners and skilled professionals—of 53.53 per cent. (The highest jurisdiction is Nova Scotia at 54.00 per cent.)
In contrast, California was the highest-taxed U.S. jurisdiction with a combined federal-state top personal income tax rate of 50.30 per cent. Indeed, California has earned its reputation in the U.S. as being extremely high-tax (while having warm temperatures, beaches, Hollywood and so on). So it should alarm Ontario policymakers that even purely on tax terms, their province is markedly less attractive.
But wait, it gets worse. Only looking at the top bracket rate between Canadian provinces and U.S. jurisdictions is potentially misleading because the top Canadian brackets tend to apply at a lower income. In fact, while Ontario’s top personal income tax rate applies to income above C$220,000 (in 2018), California’s top rate only applies to income above US$1 million (in 2018-2019).
Our study adjusts for this complication by asking: What is the combined federal-provincial (or federal-state) personal income tax rate applicable to various income levels? For example, for people making C$150,000, the applicable rate in Ontario is 47.97 per cent (the third-highest among all 61 jurisdictions behind only Nova Scotia and Quebec). In contrast, someone making the equivalent income in California only faces a combined rate of 33.3 per cent—a whopping difference of 14.67 percentage points.
Of course, Ontario’s finances are a mess with the province buried in debt. However, provincial leaders must resist the urge to “solve” the problem by tightening the screws on taxpayers. As the above numbers indicate, Ontario is already a much less welcoming haven for high-income workers and entrepreneurs compared to even California, not to mention other high-growth U.S. states (such as Texas) with no income tax.
The impact of tax rates on business formation is not mere theory (another recent study shows provincial tax rates have a measurable effect). If they wish to promote investment, job creation and economic growth—which is the only long-run solution to growing out of their debt hole—Ontario policymakers must reverse recent trends and reduce the tax burden. Next month’s budget is a good place to start.