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The Other Half of the Drummond Report: Ontario's Revenue Options

Blog posts reflect the views of their authors.

Economist Don Drummond was asked to look at ways of solving Ontario's perceived budget crisis, but he was limited to how the government spends, with little in the way of revenue options. The reason for this is fairly obvious: Dalton McGuinty's Liberals wanted to stop Drummond from suggesting large tax hikes that might be unpopular with the sort of people that McGuinty feels he needs to stay in government. This suggests that this narrow focus avoids an important part of the debate.

The main reason revenues are imporant is because of the global recession caused by the credit crunch, which collapsed government revenues while putting new pressures on social programs. Drummond is skeptical that Ontario will grow out of its budget problems, projecting a mere 2% in GDP growth per year. Importantly, though, private sector forecasts put that at 2.4%. This doesn't seem like a big difference, but Ontario NDP leader Andrea Horwath has suggested that using the slightly rosier scenario would put $10 billion more in the province's coffers by 2017-18.

Given that the fiscal gap was projected by Drummond to scale up to $30.2 billion by 2017-18 under status quo assumptions, it may not be enough to simply hope for the best. But there are a lot of options beyond deep cuts to spending. For example, the government has lost billions to tax cuts since the Mike Harris years, and it may be time to reverse this trend. Hugh Mackenzie at the Canadian Centre for Policy Alternatives estimated in 2010 that the Harris-era tax cuts, net the McGuinty health premium, are costing the government $18 billion a year. Given that Ontario's deficit is currently $16 billion, this seems important.

Sid Ryan at the Ontario Federation of Labour has called for a reversal of the corporate tax cuts. This would only raise a fraction of the projected budget gap - raising the general corporate rate back to 14% would only raise about $2 billion a year. To give a sense of how important that is, though, all proposed primary and secondary education spending cuts in the Drummond report (except Full Day Kindergarten, which is unlikely to be scrapped) total $1.4 billion.

The Drummond report does include some limited suggestions on revenue - including rebalancing education property taxes - which amount to about $2 billion a year that is not included in his preferred scenario. However, given that a number of his proposals are unlikely to be implemented, this is also probably about a wash with some of the "politically impossible" changes like eliminating Full Day Kindergarten (which costs $1.4 billion).

One way to close part of the budget gap would be to follow what other provinces have done. For example, both Liberal Quebec and NDP Nova Scotia have raised their sales taxes by 2 percentage points in order to move into the room left by Harper's GST tax cut. In Ontario, raising the combined HST to 15% when the province's deal with the federal government expires could raise billions - a simple estimate of mine would be $4 billion a year.

Nova Scotia also raised their top combined personal income tax rate to 50%. In 2007, the Ontario NDP estimated that a 2-point increase in the top rate for very high earners (to about 48.5%) would raise about $1 billion in new revenue. A larger increase against high income earners could fit with the idea that "we" should not pay for "their" crisis. Just following Nova Scotia's example on this point could raise enough money to avoid cuts to the social services sector of the Ontario budget.

Another area that revenue increases could be combined with social goals would be taxation of pollution. For example, a carbon tax like that introduced by the British Columbia Liberal government could raise something like $3 billion a year (my rough estimate based on tax of $30 per tonne of carbon dioxide equivalents on a similar profile as BC). In BC, this is revenue neutral, but in Ontario it could be used to close the budget gap, perhaps with offsetting tax credits to protect low-income families. The federal Green Party suggests a carbon tax of about $60 per tonne, suggesting that ecotaxes could raise much more if ratcheted up over time.

Some have suggested increased taxation of the financial sector as a modest stabilizing and revenue measure. This sort of reform could bring in billions in tax revenue over time. There is widespread talk about finding ways to reorient the economy away from speculative activity towards sustainable production, and this sort of tax could play a role in a policy response to such problems. It is difficult to estimate the impact of such taxes given the wide variety of roles they could play and the problem that such taxes would quickly be partially passed on to consumers in the absence of strong regulation.

A simple mix of the revenue measures above - HST hike, $30/tCO2e carbon tax, 50% top rate, 14% corporate tax - might raise something like $11 billion in new revenue once phased in, wiping out most of the effects of the fiscal gap caused by tax cuts and recession. However, it is easy to come up with ways to make such a program more progressive and expansive by including new taxes on upper-middle income earners. For example, comprehensive income tax reform could include higher taxes on well-off Ontarians concentrated in the suburbs in such a way that reduces income inequality in a province with severe imbalances between rich and poor.

Beyond the above, we need to look beyond simply rebalancing through the tax system, and stop putting so much power in the hands of a small number of experts. Economic debates should work from the bottom up - we should set priorities and then meet them. This article shows how we can easily afford the programs we want, but that much is pretty obvious to anyone already. What is most important is we find new democratic ways of relating to avoid such crises and austerity in the future.

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