Tax Burden on New Investment Underestimated by Ontario: C.D. Howe Institute

By C.D. Howe Institute —— Bio and Archives December 5, 2012

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TORONTO, - The Ontario government underestimates its tax burden on new business investment because it measures that burden without taking provincial business property taxes into account, according to a report released today by the C.D. Howe Institute. In "Hiding in Plain Sight: The Harmful Impact of Provincial Business Property Taxes," Adam Found and Peter Tomlinson recommend that Ontario start including these taxes when it estimates its marginal effective tax rates (METRs) on capital.

The province of Ontario collected $3.8 billion in provincial business property taxes in 2010. This tax on business investment makes Ontario a less attractive place for job-creating investment than the province's current METR measures imply. "Excluding business property taxes means the province doesn't get a true picture of its relative attractiveness for new business investment - and doesn't adequately recognize the economic benefit of reducing those taxes," said Peter Tomlinson, a sessional lecturer in economics at the University of Toronto.

Provincial governments in Ontario, Alberta and British Columbia, note the authors, now hold the taxing power once held by school boards. This power shift has transformed a local education tax into a business property tax resembling the capital tax Ontario repealed in 2010. When school boards controlled the business education tax, it combined - at least potentially - two separate taxes: a benefit tax financing local schools and a tax on capital investment. Provincial takeovers have since eliminated any benefit tax component. From the standpoint of investors, business education taxes - despite their obsolete name - are now simply provincial business property taxes. Based on their own METR estimates, the authors find that including provincial business property taxes adds substantially to METR estimates in Ontario. The impact of the tax on British Columbia's METR appears to be somewhat less than the impact in Ontario, while the impact on Alberta's METR is substantially less. The substantial impact of the business education tax on Ontario's METR, say the authors, lends strong support to the case for parity between business and residential education tax rates. They estimate that if the tax rate was reduced to parity with the residential education tax rate, its METR impact would be almost eliminated. Even an announcement that business/residential parity would be attained in 15 years would immediately reduce the METR impact of business property taxes, owing to the announcement's impact on investor expectations. Co-author Adam Found, a PhD candidate at the University of Toronto, observed that "as much as possible, METR estimates need to include all taxes on capital investment. While Ontario has substantially improved its investment climate by targeting reform to taxes included in METR estimates, these estimates have so far excluded the BET. Once Ontario's fiscal circumstances permit tax reductions to resume, I hope the BET is included in published METR estimates. If it is, property tax reductions will get their rightful share of attention." For the report go here: