Ontario should follow Alberta’s lead on corporate taxes
Much has been made of a reported friendship between Premier Doug Ford and Alberta Premier Jason Kenney. However, there’s at least one stark difference in the policy approach of the two in their first year in office.
Premier Kenney has committed to a substantial reduction in the general corporate income tax rate in his province, whereas Premier Ford has not, deciding in his first budget instead to maintain the same general corporate income tax (CIT) rate as his predecessor. As a result, Alberta is making major strides towards tax competitiveness while Ontario is standing still and being left behind.
At present, Alberta and Ontario have nearly identical provincial corporate income tax rates (Alberta at 12 per cent, Ontario at 11.5 per cent). However, that will soon change. Again, Premier Kenney has committed to gradual reduce his province’s CIT rate by one percentage point per year over the next four years, which will bring it down to 8 per cent, the lowest in Canada. And again, Ontario has announced no similar moves.
That’s bad news for Ontarians.
Extensive research shows that Ontario’s corporate income tax at current levels is one of the most economically damaging components of our tax mix. That means that each dollar of revenue raised through the CIT does more economic damage than other taxes (sales taxes, for example). As such, reducing reliance on the CIT makes the overall tax system more efficient and helps the economy grow faster than it otherwise would.
The case for lowering Ontario’s CIT is further strengthened by recent developments in the United States where the federal government has substantially lowered business taxes. Where Ontario used to enjoy a substantial business tax advantage over competing U.S. states, that advantage has been quickly erased.
Premier Kenney’s plan to cut the Alberta CIT to 8 per cent represents a well-measured response that will help Alberta compete with American jurisdictions. Critics have been quick to criticize Premier Kenney’s CIT reduction as merely a “handout to the rich.” But this criticism reflects a fundamental misunderstanding of how the CIT works. Everyone who holds shares in corporations—including everybody who contributes to the Canada Pension Plan—is hurt by high CIT rates. So reductions benefit people throughout the economic spectrum, not just the affluent.
What’s more, substantial research shows that businesses must often adjust to higher CIT rates by not raising wages as quickly as they otherwise would. Therefore, over time the cost of higher CIT rates are divided between shareholders and those who work for businesses that pay the CIT.
Effective governance can sometimes be as simple as copying another government’s good idea. If the Ford government follows the Kenney government’s lead and commits to reducing the CIT to 8 per cent over the course of its mandate, it will help spur economic growth and send a powerful signal to investors that Ontario is indeed, as Premier Ford likes to say, once again open for business.