The Impact of Federal Tax Reform on the Province of Ontario

Introduction:

It is well known around Queen's Park that, for any charity drive, The Honourable Robert Nixon will produce a few loaves of his own homemade bread for raffle or bake sale. Today, we've baked something for the baker in celebration of his first twenty-five years in office.

For a Provincial Treasurer who oversees the flow of monies both in and out of government hands, what could have been more appropriate than a cake decorated with the dollar sign? Appropriate, too, in that the Royal York Hotel's chef created it when Mr. Nixon's son, Harry, who is at the head table, is a corporate sales director. Now the radio and TV audience weren't tuned in for our cake-cutting, but that doesn't diminish their share of the celebration honouring Mr. Nixon's twenty-fifth anniversary.

Robert Fletcher Nixon began his political career in 1962 when elected Provincial Member for Brant-Ox ford-Norfolk. On January 16,1967, he won the leadership of the Liberal Party in Ontario, carrying on his father's political legacy. One-time Liberal Premier of Ontario, Harry Nixon began his career in 1919, which means there has been a Nixon in office for sixtyeight consecutive years. You have two sons and two daughters; can't you persuade at least one of them to follow in the family footsteps, sir?

In the '50s, Bob Nixon taught high school in Sault Ste. Marie and Toronto.

He holds an Honour Bachelor of Science and an Honorary Doctor of Laws degree from McMaster University. He is truly from the "back forty" as a real and active farmer operating two hundred and fifty acres west of Toronto, but in the legislature as leader of the opposition, Mr. Nixon has developed expert knowledge of parliamentary procedure and now is Government House Leader. His reputation for fiscal responsibility, social compassion and commitment to more open government makes him a key minister in Premier David Peterson's Cabinet. He's a man of many portfolios: not only is he Treasurer and Government House Leader, but he is also Minister of Economics, Minister of Revenue, and acting chairman of the Management Board-and this is only his first twenty-five years!

Ladies and gentlemen: The Honourable Robert Nixon.

Honourable Robert Nixon

Thank you, Madam President, and ladies and gentlemen. I appreciate your presence here today.

The fact that there are a few pieces of cake left over is an indication, in my view, of, let's say, satisfaction and lack of concern with the finances of the province, and that is certainly a positive way to look at it.

I wanted also to comment on the speech, a very fine speech that I heard earlier this week, by the Minister of Finance for Canada, Michael Wilson.

He brought down his Budget, his third Budget, just a couple of weeks ago, and the impact of those fiscal decisions on this jurisdiction are certainly of great interest to all of us as taxpayers and residents of Ontario, citizens of Canada.

The description that I think was somewhat pejorative was that perhaps it was not an exciting budget.

But certainly, as a Treasurer myself, I think those are the very best kind.

It is the exciting Budgets that really disturb the taxpayers and trouble the politicians and disrupt business. The steady evolution of policy surely is a more useful and healthy way to approach these particular changing times.

But the impact of Mike Wilson's Budget here is very important, of course.

In actual dollar terms in Ontario's Budget itself, it amounts to only about eight million dollars, but that doesn't mean that substantial additional revenues are not taken out of our economy, for what Mike Wilson would say, if he were here, would be for very good purposes. He added a cent per litre to the gasoline tax, which is worth about one hundred and thirty million dollars a year just in Ontario.

You may recall there was an additional cent applied in his previous Budget that went into operation about the first day of January of this year, so that is the second cent per litre on gasoline.

For reasons that are obscure, most of the gasoline companies have taken the imposition of this additional rather modest change in the tax to raise their prices by three to four cents a litre.

We buy our gas as we are on our way to the office.

In St. Georges (I often talk about the views expressed by the boys around Earl's Shell Service in St. Georges and it is where I get lots of background material that I use in my decisionmaking process) the price board out there this morning, I think, said 46.7 cents. So these prices have escalated quite substantially and this has generally caught on across the province and, presumably, across the country and it will have a substantial impact on the economy.

The intention, certainly, of the Minister of Finance was not to trigger that increase.

As a matter of fact, he is quoted as saying that, if you don't like paying that high a price, you should boycott it and buy elsewhere, but, since the Government's very own gas company, PetroCan, is leading the charge in this increase, it is a little difficult to do that, particularly when you see their announced profits for the past year being up something like twenty-eight percent, so that these things do have a tremendous impact.

I am criticised from time to time by my friends opposite in the Legislature for having a gasoline tax that is too rich by half.

I have to defend myself substantially and I won't make that particular speech here. I will hire my own hall.

But you would be interested to note that our tax, at 8.3 cents a litre, returns us just a bit over one billion dollars a year.

While we are not in the habit of allocating specific revenues in the province, you should know that we spend just under two billion dollars on building our roads and maintaining them.

There is one person here who knows all about that and would probably like to get up and get into the argument, a former Minister of Transportation, Jim Snow, whom you can hardly recognize with the luxuriant growth on his chin, but there he is.

But still our gasoline tax, while it is not allocated, either now or in Jim's time, does go in large measure to support a good road system developed over the years and one we want to maintain and expand.

There is one aspect of the Budget that I found particularly interesting and that is the Decision by the Minister of Finance to speed up the payments of personal income tax collections on a regular basis from corporations and companies that return more than fifteen thousand dollars a month.

That alone has a significant impact here on our provincial revenues, since Mike Wilson and his colleague, the Minister of Revenue federally, is our tax collector as well for personal income tax.

If he were to pass on the speed-up to us, his clients in this regard, the additional revenues on a one-time-only basis would be two hundred million dollars.

That is why we are contacting him rather formally and without delay, to be sure he knows that we want our share of the revenues that he is collecting.

I think the most important references he made in his Budget really was a reference to something yet to come. He indicated that there would be a White Paper on tax reform available in the spring, and we are awaiting that with the greatest of interest.

I should say that one of the most interesting experiences I have as a relatively new Treasurer is to join a group of Treasurers, chaired by Mike Wilson, the group meets on a fairly regular basis, and we have a chance to compare our problems and the situations that we are experiencing, but particularly we have had a chance to discuss with Mr. Wilson how the provinces should and would desire to fit into the proposals for tax reform that are coming from the federal Minister of Finance and the federal Government.

These were largely triggered, and certainly pushed along with some enthusiasm, by the initiative taken by the American government in tax reforms just going into effect for this taxation year.

The reduction in personal income tax is particularly important and our people are expecting a similar consideration. They want to see that the tax system is made fairer and simpler, more readily understood, and with the distribution of taxation responsibilities that is seen to be up to the mark as far as modern community requirements are concerned. Mr. Wilson has indicated that he, too, intends to reduce the rates of personal income tax, and since we are partners in a tax-collection agreement, we will obviously be sharing in that situation.

I am sure you are aware that, going well back into the middle of the third decade, 1935-36, a tax-collection agreement was entered into whereby the Province of Ontario establishes a provincial income tax and the rate of taxation, and the Government of Canada, in order that there not be duplication of tax administration, does the collection for us and sends it to us.

They also make a projection, that we follow in our budgetary predictions, as to what that amount of tax will be and this year their projection was a bit low of the mark. Because of the buoyancy of the Ontario economy, the fact that our employment levels have improved substantially, that the unemployment level is now 6.6 percent in Ontario, whereas without Ontario's inclusion, it is over eleven percent in the rest of Canada. Also the wage increases have been substantial so that our revenues were substantially higher than predicted at that time.

But the whole concept of tax reform must involve us because of our traditions of co-operation with the Government of Canada. The last time there was an attempt to tax reform, going back into the'60s and early'70s, the provinces, and particularly Ontario, was very much concerned that the initiatives that were proposed at the federal level would have a negative and deleterious effect on our economy. For that reason, some of those changes were not brought forward and others were brought forward in a different way.

There is no doubt that the attitude and approach by the Province of Ontario in any federal initiative involving the tax base is considered seriously. There is no doubt about that, and, for that reason, Mr. Wilson is consulting with the treasurers, I believe, in a very useful way.

His idea to reduce personal income tax and also to adjust corporation tax rates so that we are going to be as competitive as possible and be seen to be competitive with the American jurisdictions is another factor that we have to take into direct consideration. The Americans, while they reduce their corporation tax rates, remove many of the preferences and loopholes. They had many more than we have, but they actually paid by increasing corporation tax revenues in this way while still simplifying and adjusting their rates.

The situation is a bit different in Canada and, as nearly as I can tell, it is the intent of the federal initiative to really pay the cost of tax reform by substantially renovating our federal sales tax or manufactures tax as they sometimes call it. In order to have a substantial increase in revenue at the federal level from sales tax, Mr. Wilson is proposing something that he chooses to call a business transfer tax. Those of you in business, if this goes forward, will certainly know all about that in short order. When we talk about tax reform being as simple as possible and understandable, I know in looking at the various proposals for this type of tax, that there be many months of anguish while business people accommodate themselves to the difficulties and complexities of something that is entirely new. But it is a productive tax indeed and, of course, the tail-end this province and all of the other provinces except Alberta slap on a retail sales tax, in our instance of seven percent, which simply is the last withdrawal of revenue in the transferences of articles as they are manufactured and finally sold.

For the business transfer tax, of course, the thought is whether it would encompass far more than articles but most services as well. So those of you who are brokers or lawyers might very well expect at the bottom of your bill to add on a small percentage for Michael Wilson in which, no doubt, the provinces will share in some degree.

But when I talk about corporation taxes, we in this jurisdiction must be very careful that our competitive stance is maintained as well. Our growth rates for corporate investments have far exceeded those of the other provinces and most of the states in the northeastern part of the United States. As a matter of fact, the economists in the Treasury were able to tell me that we are among the fastest growing jurisdictions in North America by way of job creation and investments on a per-capita basis. Massachusetts perhaps has a lower unemployment level and is a bit ahead of us in certain developments.

The number of things that you would be familiar with has substantially triggered that. There is no doubt that the dramatic decrease in world prices for petroleum gave it a stimulus that was basically unexpected fifteen months ago and that dramatic drop has meant an infusion of available capital and other operating money that otherwise would not have been there.

The economists tell me that the bill for Ontario that was expected before the drop was in excess of six billion dollars for petroleum other than natural gas, and, because of that drop, this year the actual expenditure was something less than four billion dollars and that gave a certain stimulus to the economy that is reflected in many of the decisions you people have been part of. At the same time, the relative low value of the Canadian dollar compared to the American dollar has given us a great lift as well. It is now up just to about seventy-five cents compared to the American dollar and that is the rate where, frankly, we begin to be concerned a bit at it cutting into our competitive edge. And with world oil prices the way they were, and with interest rates dropping below ten percent, now a prime rate of about 9.5, there is a combination for stimulation and competitiveness that has put us as leaders in the world. And those people who control the capital pools in Japan and elsewhere look at us as really a prime contender for their investment.

Over the last year and eighteen months, you know that General Motors itself has made a huge commitment for the improvement of manufacturing facilities in Oshawa, that Toyota has decided to go in a green-field development of a new factory in Cambridge. I drove by there yesterday and the construction is under way, the land is being cleared, the cranes are being erected and everything is go.

In Ingersoll, GM once again, in association with Suzuki, is undertaking a new plant that involves the investment of something like five to six hundred million dollars and is going to change many of the prospects in Southwestern Ontario for young men and women in their career choices and work involvement.

These things are happening as a result of the competitive position that Ontario has.

As Treasurer, I take no credit for that; I simply point out to you that this is a good time for entrepreneurs and people who are contemplating investment to go forward in that regard.

The Government doesn't absolve you from the risk in anyway, but we are anxious that the rate of development and capital commitment continues at the rate we have experienced in recent months and years.

Our own tax base is performing very well indeed.

I have already referred to a surplus of revenue that was not predicted at the time of the Budget last May, based on the rate of economic growth, which has been truly surprising.

The personal income tax, the corporation income tax, our sales tax certainly, even our lottery revenues have been far ahead of projections.

It is difficult to determine when you come to lottery revenues, for example, what triggers that, but the growth has really been a phenomenon.

I reported to the Legislature and to the public the specific sources of those revenues and their disposition in the publication Ontario Finances.

There are a few copies that will be available, if anyone would like to take one back to the office or home.

I think that extra nine hundred and nineteen million dollars is going to be a continuing problem for me. My friend, Larry Grossman, tells me that I should lower taxes and, as soon as I do that, l should reduce the deficit and at the same time increase services.

And I know the kind of economic thought that that is based on; I call it "Opposition economics" because I practiced that for many years.

We would all like to reduce taxes and increase services and, at the same time, cut the deficit.

You will be glad to know-I know Bill Sommerville will be glad to know-that we applied a large percentage of it-two hundred million dollars-to the reduction of the deficit, that when we took office twenty months ago the deficit was running at about $2.2 billion.

At the present report, which is available to you, it is at $1.3 billion.

Still far too high, Bill, but substantial accomplishment, even taking into consideration the productivity of our revenue base.

We have plans to improve it, you will all be glad to know, but I know you would also require the Government of the day to recognise and accept its responsibilities, to see that our medical services and hospitals are well supported.

We have already given a capital commitment over a five-year period, involving an amount that is reported at eight hundred and fifty million dollars at the present time, but there is every indication it will be substantially beyond that.

We have made a specific commitment to renew our cancerhospital treatment facilities, beginning with the Princess Margaret, which will be a hugely expensive commitment as well.

To improve our funding for education, particularly postsecondary education, we have also committed a considerable increase in expenditure over a period of years.

So the balance that comes between reducing our deficit to zero, which would be great, or to even run a surplus and on the other hand to fulfill our community responsibilities as a government, is one that politicians must take and we must be judged on our decisions by our colleagues in the Legislature. This is more than a formality, if you know the composition of our Legislature where the Opposition parties substantially outnumber us.

There is always, of course, the recourse to another jury, and I am not sure when that will happen but politicians always, of course, have to keep their political powder dry and keep their arguments in good shape when the occasion comes when we must discuss this on the hustings.

We also have to prepare ourselves for a slowdown in our economy, which certainly must come eventually.

There may be something in the ingrained rural-farmer, Protestant approach to economics that makes me, perhaps, as sensitive and if not fearful of that as anyone would be, that while things are good, you are supposed to be storing up the recourse for the times when they are not so good. And our programmes have to reflect that.

I suppose the easiest way to do that is to reduce our deficit financing to the lowest possible level so that, when it is necessary to have programmes that are more stimulative, we have the resources to do that.

But at present, with the inflation rate just about four percent and dropping slowly, with real growth once again at three-and-a-half percent projected for the coming year, with housing starts up a full twenty-five percent over last year, and the commitment of capital at the rate that I have described, things certainly do look rosy. In any sort of comparison, we lead the jurisdictions of Canada and most of the jurisdictions in the United States in opportunities.

This carries with it the huge responsibility to see that the good things that are available for most of the community are, we hope, as readily available to all of the community.

I come from a farming area and I will at least give you a transition as useful and effective as possible and provide the leadership for the changes that must occur.

It is also necessary for us to realise that investments by governments take a wide variety of forms, that I have always felt that under the Constitution of our nation, the provincial responsibility for education is the most important.

It used to be the most expensive. Now, of course, the provision of health services has far outstripped that.

But education still is, in my view, the best investment we can make of public dollars.

We as a government have made a commitment to improve the quality of education and particularly to see that research and development in technology is going to assist our people, our young people particularly, to participate in the competition on a worldwide basis, which is so important for them as individuals and for our economy as a whole.

So these are great days to be involved in politics and government at any level and particularly to be Treasurer of this great jurisdiction at a time when the economy is buoyant.

I must say that my colleagues in government have many constructive and innovative ideas to use up any surpluses that might accrue.

You could imagine how sometimes we get into rather violent discussions, me on my part trying to hold the line at a time when the needs of the community expressed by so many knowledgeable groups approaching government, usually through the media, that we want to respond in an effective way in that regard.

But still we are in a long tradition of effective government in the Province of Ontario, that the people have placed some confidence in us, and there is every indication that they are expecting us to respond to community needs in an effective way.

So these are exciting days for all of us to be alive in this jurisdiction at a time when our opportunities and our responsibilities are so great.

I know it would be useful for me, and your president has arranged this very thoughtfully, if 1 were to hear your views and have an opportunity to respond to your questions for whatever time remains.

I want to thank you for your invitation, to wish you and your club well in the future.

Questions and Answers

Q. Mr. Minister, have you considered combining the administration and collection of Ontario's sales tax with the proposed federal Business Transfer Tax? If yes, What are your conclusions so far? Andrew, Keyon, CIBC

A. Yes, we are giving some consideration to as much cooperation as is practical. If the business Transfer Tax goes forward according to Mr. Wilson's plan, it might very well be possible for any of the provinces or even all of them to piggypback on that particular tax, with our direct sales tax being applied in the usual way. Anything that would cut down the confusion resulting from this change I think would be worthwhile. My own views, since it asks for my conclusion, is that it is a bit premature for us to indicate that we are going forward with discussions that would result in that. The idea is that the federal Government should establish their new tax and then, some time in the future, if it is apparent that we can cut down duplication, then certainly we should give it careful consideration. In other words, I think it is a good idea but not right now.

Q. Why aren't lottery winnings taxed? Stanley Crow, Retiree A. I think the best answer is: to make them as attractive as possible. There are some people here who could give me perhaps a more appropriate answer as far as the legality of its goes, is it a capital gain? Nobody is looking at me, so let's leave it, and I don't know. The Americans tax their lottery winnings and anybody who is an American and wins a Canadian lottery and the money is paid to them over there pays the regular income tax on it. It is quite an interesting source of revenue and growing, in fact, faster than I think is healthy. The interest of the community in all sorts of gambling enterprises is not a new phenomenon but it is one that seems to be picking up pressure.

Would you comment on the federal scientific research credits and comment on how you will stimulate research? Phyllis Coast, Ryerson PolyTech.

If we are talking about the federal initiative to stimulate research with taxation assistance, I think the last provincial report of this type-Ontario Finances-that my predecessor, Betty Stephenson, tabled in the Legislature in the dying days of the old government showed a decrease in revenue for the Province of Ontario of six hundred million dollars as compared to what it was expected the revenues would be. That this unexpected decrease would be compared, let's say, with our seven hundred million dollar unexpected increase this year, in neither case did it have much to do with the Treasurers of the day but the decrease Dr. Stephenson reported unexpected was almost totally associated with the payouts from the income tax base federally, and which the province joined, for those incomes, for those research tax credits that we hear about from time to time. As a matter of fact, one of the Toronto dailies published in the morning had a series last week indicating what a debacle that was. I think that our policies now are stronger perhaps in Ontario than they are anywhere else. The commitment made to research and development of technology was enunciated in the Speech from the Throne a year ago with the establishment of a technology fund supposed to be a billion dollars over the next decade. We have been criticised, and properly so, in my view, for not getting the expenditures from that fund cranked up this year fast enough. The Premier was advised in the allocation of those dollars by a very competent committee that is not going to be rushed and they are not going to have the expenditures approved unless they feel that they are warranted. I see that the Prime Minister of Canada has announced a similar advisory group, and I think that the approach taken by the Government of Canada and the Government of Ontario should certainly be in concert to stimulate general research, particularly in technology that can be used by our industries in a productive way as far as our competitive stance is concerned. I don't want to make my answer too long but, as a sort of a scientist myself going back a few years, I am also aware of the value of pure research and not necessarily directed at making more widgets faster. This is an essential component of any sort of a national or provincial program and it is best in my view directed through the universities by an independent allocating group of scientists and academicians. This is also a part of the federal and provincial thrust in this regard. I think it should be much more heavily funded, but, once again, we get back to the Sommerville Equation. I don't know how you can do that and everything else too, but this is certainly one thing that has to have a priority in our expenditures.

Mr. Minister, How will the provinces share in the reformed federal sales tax? Paul Dixon, Peat Marwick, Mitchell There will be no sharing to begin with at all; I answered that question briefly earlier. But it is quite possible in the future that, if the business transfer tax is flexible enough and is, in fact, construed as a value-added tax, that it would be possible for the provinces to do just as we have done with the personal income tax: establish by legislation in our various Legislatures our involvement in the federal tax. We would accept their tax base and apply a rate that would be collected on our behalf in our own provinces. So if Alberta wanted to continue to have no sales tax at all, it could do so and that recognising that the federal base for taxation is much broader than our provincial base, we would be able to reduce our sales-tax rate substantially while maintaining our revenues. Mr. Wilson has repeatedly said that the changes that he has in mind should be revenue neutral, probably that is revenue neutral when enacted. Maybe a year later, the revenue would go down or maybe even up.

The appreciation of the meeting was expressed by Douglas Derry, FCA., a Past President of The Empire Club of Canada.