Tax Reform—Ontario Style

MR. JOLLIFFE:

Earlier in this season the Empire Club has been addressed by the British Chancellor of the Exchequer and by the Canadian Minister of Finance. It is altogether fitting that the trilogy should be completed by our distinguished guest today, not only because of the office he holds but also because of his personal qualities and his unflappable composure in what must be one of the most difficult assignments ever given by the Province of Ontario.

The Hon. Charles S. MacNaughton is our twentysecond Provincial Treasurer since Confederation. Four of his predecessors were also Prime Ministers. One of them, the late Mitchell F. Hepburn, took office 35 years ago. In his first year, as I recall, the budget was little more than $50,000,000. Since then Ontario has grown beyond recognition--and so has the budget. Instead of struggling in a morass of depression and deflation, the Treasurer today has to cope with problems of expansion, inflation, and rising demand in a province where population, trade and industry are all growing by leaps and bounds, and public services must keep pace.

Our guest is responsible for Ontario's three billion dollar budget. He is also Chairman of the Treasury Board which screens and reviews all the Government's activities and spending.

Since his appointment in November, 1966, he has led a major reorganization and applied modern management techniques in budgeting, planning and controls. He had already demonstrated his flair for modern methods when he organized the "GO" transit system, the first of its kind in North America. He has been a business man not only from the word "GO" but much earlier, when he had a successful career in the Seed Industry and the Canadian Seed Trade Association. He sits in the Legislature for Huron County, but what's more important, his position as Treasurer of the largest province makes him, like his Prime Minister, a big figure in the future of Confederation, where so much depends on the prosperity and strength of Ontario, and on the wisdom of its leaders.

Gentlemen, the Hon. Charles S. McNaughton.

MR. MACNAUGHTON:

I am honoured to attend my first meeting as a member of The Empire Club of Canada with this pleasant assignment. I regard it as a compliment, a responsibility and an opportunity to contribute to traditions which obviously I admire.

The objects you espouse, I know, are often misunderstood and unappreciated, just as are the elements of history which lie behind this organization.

Many of the misconceptions, of course, are not as naive or as humorous as some of the schoolboy blunders that emanate from the fascinating study of British history. There are many variations of these innocent misinterpretations of those events and notables that form part of our rich heritage. Perhaps I can quote a few recorded ones that you will enjoy.

"Magna Carta provided that no free man should be hanged twice for the same offence."

"Henry's popularity was shown by the title he gained as 'Offender of the Faith'."

"Charles I conducted three Parliaments and was all the time dissolving."

"The Government of England is a limited mockery."

Those innocuous errors from examination papers serve as a useful introduction to "Tax Reform, Ontario Style". I hope to assure you that the comprehensive programme set out in our white paper on The Reform of Taxation and Government Structure in Ontario is not "limited mockery"; it is not a concept for dissolving Confederation; it should not offend those with faith in the nation, and it is not designed to strangle, financially or by any other means, the taxpayers in this province.

I believe the Ontario approach to tax reform is predicated on the national interest, in the sense that national interest embraces the responsibilities of all levels of government. I suggest to you that you can divide governments into three sections but you cannot dissect the taxpayer into federal, provincial and municipal portions. The national interest must encompass the capacity of the individual to pay all of his taxes without punitive pressures.

Before I proceed into tax reform, however, let me dispel some misinterpretations, and emphasize some features, of the budgetary programme for the current fiscal year, 196970.

I am well aware that my 1969 Budget came as a surprise to many people who had been concerned about the "fiscal nightmare" described by Prime Minister Robarts and by me last year. Some commentators have dismissed that nightmare as a political ploy to gain concessions at the bargaining table.

I want no person in Ontario to misconstrue the balanced budget I was able to present to the Legislature on March 4. I do not want anyone to misinterpret what some observers felt were "surprisingly modest" tax changes in view of the stringent measures that had been anticipated. I must disabuse any citizen of the impression that Ontario's financial challenge is not as difficult as it had been portrayed prior to March 4.

Last year's projections of the chronic imbalance in Ontario's fiscal future have not changed. I hope they are somewhat mitigated but I have no illusions about the growing disparity which they reveal.

The very anticipation of the impossible deficits facing Ontario prompted my determination to present the first balanced budget to the Legislature in over 20 years. The most obvious response to the challenge was severe restraint on expenditure growth but, as the Prime Minister and I had warned, this will not resolve the problem.

I remind you that $400 millions was cut from the estimates of our departments; that our expenditure growth rate was reduced to 7.5 % or less than one-third the average of the past three years; that this 7.5 % is considerably lower than the 9.5 % growth rate anticipated by our federal partners; and that we have kept the increase in expenditures below the expected rise in the gross provincial product.

Many people may regard these efforts as elementary and even inconsequential. I suggest such an attitude does not recognize the sacrifices involved.

The postponement in construction of hospitals, educational and other priority facilities will not be without repercussions. Holding the line in operational and programme costs entails far-ranging effects on other governments, institutions and agencies who depend upon provincial support. Indeed, the consequences are already becoming evident and are contributing to a greater public awareness of the extent to which provincial and municipal expenditure is geared to pressing needs in our society.

The goal of a balanced budget encompassed other cogent considerations which will be evident to this audience. Economic conditions dictated a need to cool off the inflationary pressures. The high cost of borrowing in the capital market removed any temptation to increase the public debt as an alternative to either tax increases or expenditure cutbacks. Above all, from a longer-range view, we had to establish a solid financial base from which to launch a tax reform programme.

Perhaps as important as any consideration was the responsibility Ontario bears to the economic health of the nation itself. This province, dominant as it is, cannot be indifferent to the effect it has on the Canadian scene or on our sister jurisdictions. Nor can we be insensitive to those policies of the federal government that are demonstrated to be in the national interest.

With our economy running strong and our unemployment relatively low, Ontario perhaps was in the most favourable position to respond to the federal appeal for restraint and to absorb the consequences of it. Some of our fellow provinces, who are not as fortunate, might suffer if Ontario squeezed the capital markets or applied its fiscal strength at an inflationary angle.

The response of Ontario was critical to the success of a national restraint policy. The thrust had to be applied where it would be most effective. I am confident that the benefits of Ontario's balanced budget will spread far beyond our borders.

This holding action, however, will not have the same salutary effect on our own longer-run provincial problems. It is impossible to conceive how we can contain our expenditures to a growth rate of 7.5% with the pressures arising from population growth and the social and economic evolution of a complex, technological and urban community.

The problems and priorities of poverty, housing, congestion and pollution will not be suppressed by budgetary restraint. Like ignored sores, they will fester from lack of attention.

These problems, too, relate to the national interest even though the responsibility in these fields lies primarily in provincial hands. The demonstrated and intensifying imbalance between expenditure roles and revenue sources, endemic among the provinces, is a national problem of substantial proportions.

Nor can a balanced provincial budget do anything more than contribute toward a firm financial footing for a priority on the other side of the fiscal fence. The reforms in taxation, on the revenue side, are important in resolving the priority problems on the expenditure side.

Tax reform, in its total sense, should be no less a national objective than expenditure reform. Both are requirements of changing conditions and both affect the welfare of the individual taxpayer and citizen.

The Ontario style of tax reform is built around the major distortion in Canada's total tax package, the insensitive property levy. This municipal tax displays relatively little consideration for the ability of the individual citizen to pay the amount it requests of him. This regressive feature in the tax itself is compounded by the rapidly increasing load it bears of the priority expenditures of the day. Despite all the provincial, and some federal, measures to reduce the callous weight of this tax, it remains the prime culprit in the development of a fair and progressive tax system.

To provide effective relief for this municipal revenue base, there must be a substantial shift of costs to the more progressive tax fields jointly occupied by the federal and provincial governments.

Our intensive research has led us to the inescapable conclusion that Ontario must develop its own personal income tax system. Our system must have a base, structure, set of rates and provision for exemptions or grants that will enable us to offset the individual burden of property tax as well as those consumption taxes that are regressive in character. There is no other effective method of lifting the load from our low-income people and from those on fixed incomes.

The present federal income tax system, which provides for a modest sharing by the provinces, does not permit us to vary the rates or structure or to make other adjustments to achieve our goals. We are locked in to their requirements and we do not have a voice in determining the form of tax that makes up our share.

To develop a more equitable and viable taxation programme, our starting point must be a provincial income tax system through which we can offset the disproportionate burden of property and consumption taxes. This is the core around which Ontario's reform will be wound.

The integration of provincial and municipal taxes requires a tax credit system which allows the combined burden of the integrated tax to be adjusted to the income capacity of the individual. This credit mechanism can provide for relief of property tax, in relation to individual income and the number of dependents that income must support. A similar credit could be provided against retail sales tax.

Considerable potential exists in such a flexible mechanism for improving both the efficiency and effectiveness of various government programmes. As I mentioned in the reform paper, this system lends itself to the establishment of a positive income supplement since it would provide for refunds in those cases where total credits exceed total liability.

I believe such a programme should be designed to provide effective help to those people who will benefit from the opportunity to become productive members of society. I could not countenance the connotation of a guaranteed income programme that might lead some persons to expect the state to support them in voluntary idleness.

The potential exists to pinpoint our attack on the poverty priority, to eliminate the waste of universal income maintenance programmes to concentrate our help on those who need it most. All of this could be done through a single taxation mechanism, rather than through multiple payments and agencies. It is essentially a question of the wisest economic investment of limited funds.

To achieve an equitable tax system based on ability to pay, capital gains must be recognized as an income source generated by our strong economy. Adequate allowance must be made, however, for risks and losses. Our view is that the taxation of capital gains should be comparable, but not identical, to the U.S. system, which has not stifled initiative or capital formation in that nation. Our tax will be framed to meet our own concepts of equity and to recognize our particular conditions.

We are prepared to co-ordinate administrative requirements for personal income and capital gains taxation with the federal system. We have proposed a federal-provincial tax collection commission that would reduce the administrative burden for the Ontario taxpayer as well as both governments.

In three other areas of major provincial taxation, we have agreed to consolidate with the federal authority on condition that we will receive a fair share of the returns. These are our succession duties, which could be integrated with the federal estate tax; gift taxation, still another form of income; and corporation income tax.

Eventually, I would hope that the taxes on income, capital gains and gift streams would eliminate or at least substantially reduce death taxes which I regard as confiscatory.

The present property tax and its cousin, the business tax, pose two equity problems. In addition to the regressive nature of these taxes, their assessment base is riddled with inconsistencies and inequities. Many properties are underassessed, some are overassessed and some are not assessed at all. There is little consistency among municipalities and, sometimes, not even in the same municipality. This inequity extends to the treatment of particular classes of property.

If the base itself is not fair, it follows that the levy on the base multiplies the distortion, particularly as rates rise. This same base forms a major criterion for many of our grant programmes, which compounds the difficulty.

Our plan to take over the assessment function from municipalities, to launch a comprehensive attack on province-wide reassessment at current value, represents another key element in our tax reform plan.

In the meantime, the province has agreed to raise the average level of support for school boards from the present 45% to 60% over a three-year period beginning in 1970-71. We also plan to review and revise our complete grant and aid system which already accounts for more than one-half of our provincial budget. These programmes will become much more meaningful when we have developed an assessment base of uniform quality and competence.

Regional government, municipal consolidation, eventual revision of school board boundaries are also incorporated in our programme, along with other adjustments designed to provide a comprehensive framework.

It will be evident that these reforms will place severe stress on provincial sources of revenue, in addition to the real pressures I cited earlier. We are not deluding ourselves about the cost of reform or its effect on an over-burdened tax system.

The Ontario Government is undertaking and refining comprehensive management programmes to control our existing costs and to make the most effective use of limited funds. The host of programmes in this field comprises a full topic in itself. The resulting savings, however, will not be sufficient to cope with the financial requirements facing us.

These pressures on the province underline the obvious urgency to integrate our provincial-municipal tax reforms with the proposed federal programme due this year. Our plans cover less than one-half--about 45%--of the total tax bill presented to our Ontario citizens by all governments. The remaining half must be co-ordinated to achieve full equity and efficiency.

I am convinced that the fiscal dispute within Canada's governmental family can be resolved if the members are willing to appraise and discuss our problems in a constructive way. We must have a partnership approach, not an adversary attitude. We must have constant consultation, not semi-annual confrontation.

Effective tax reform, accurate expenditure analysis, joint programming, co-ordinated restraint programmes and realistic priority setting in Canada today demands full-time research by a team of representatives from both levels of government. These essentials cannot be left to on-again, off-again committees whose members are spread across 3,500 miles. They cannot be left to fringe advisors, economic councils, or independent tax foundations. Canada needs a permanent federal-provincial organization for economic and fiscal co-ordination.

Ontario and many other provinces are prepared to give full support to that kind of partnership. We are prepared to work together with other jurisdictions to develop a unique Canadian concept of national development under a progressive tax system and a co-ordinated expenditure programme.

Only in this way, only by standing together on sound fiscal concepts, will our governmental family be strong enough to cope with the apparently insatiable appetite for increased public expenditures.

The fiscal nightmare has not disappeared. It will grow worse unless our government develop comprehensive fiscal programmes which will meet foreseeable demands, establish joint priorities and integrate tax reforms.

These goals can be achieved if all levels of government will work together as partners rather than as adversaries. This is the spirit in which Ontario has put forward its tax reform programme, a spirit that transcends political partisanship. I earnestly hope that our proposals will be received in that spirit by other governments and our citizens alike.

Thanks of the meeting were expressed by Mr. Bruce J. Legge, Q.C.