High tax rate hurts Ontario’s competitiveness
Since Doug Ford’s Progressive Conservative Party won a decisive majority in the Ontario election, much of the discussion has centered around infrastructure investments, but the province’s lack of tax competitiveness should be an immediate priority for the re-elected premier.
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, savings and investment.
Consider that Ontario, relative to its U.S. peers in the Great Lakes region, is currently an economic laggard with the lowest GDP per person (a broad measure of income) compared to Illinois, Wisconsin, Pennsylvania, New York, Ohio, Minnesota, Michigan and Indiana. And all eight of these states have lower top personal income tax rates than Ontario.
Ontario’s personal income tax system looks even worse compared to other North American jurisdictions. Out of all 60 U.S. states and Canadian provinces, Ontario now has the third-highest personal income tax rate. In fact, some states (with whom Ontario competes for talent) don’t have a state income tax, so residents face only the top U.S. federal income tax rate of 37 per cent.
Of course, a wide variety of factors influence where people choose to live, but this 16.53 percentage point gap can discourage some productive and skilled professionals from choosing Ontario. For instance, it’s easy to see why high earners may find Michigan’s 41.25 per cent combined federal/state top income tax rate (which also kicks-in at a higher income level) more attractive than the tax situation in Ontario.
To be clear, Ontario’s high marginal tax rate is due to tax hikes at both the federal and provincial level. In 2012, the Ontario government added a new personal income tax bracket with a rate higher than the previous top personal income tax bracket. Then in 2014, the government once again added another personal income tax bracket with a rate of 20.53 per cent applied to income over $220,000.
In 2016, the federal government raised top marginal tax rates further, creating a new top federal tax rate of 33 per cent on incomes over $200,000, whereas the previous top rate was 29 per cent on incomes above approximately $140,000.
It’s also important to remember that when Ontario’s current top tax bracket was implemented, it was billed as “temporary”—specifically, the “temporary deficit-fighting high-income tax bracket.” Like so many “temporary” tax hikes, however, this one just won’t go away.
These recent tax changes look even worse when you consider the they probably haven’t raised very much new money for government. According to one recent analysis of the 2016 federal tax increase, due to changes in economic behaviour and reduced economic activity, the four-percentage point increase to the top rate generated almost no new money for provincial and federal governments combined. In short, the tax hike produced economic pain for no fiscal gain. Conversely, this means the Ford government could likely reduce its top marginal rate without significantly reducing the resources available to Canadian governments to provide public services to Ontarians.
Tax reform can help Ontario close the prosperity gap with its peers in the Great Lakes region. By overhauling the province’s personal income tax system, the Ford government can boost economic growth and make the province more attractive to entrepreneurs and skilled workers.