Federal and provincial tax hikes burdening Ontarians

Prime Minister Justin Trudeau recently announced that all provinces must soon adopt a “price on carbon” of $50 per tonne or else face a carbon tax imposed by the federal government.

This could mean yet another tax hike on Ontario families, who already pay 42.5 per cent of their average income in taxes and have been hit hard by recent tax increases at both the provincial and federal level. An increase in the overall tax burden is the last thing Ontarians need.

Consider what’s happened on the carbon pricing file. In the spring budget, the Wynne government unveiled details of its cap-and-trade plan, which is expected to attach a cost of approximately $18 per tonne to carbon emissions. That would mean higher operating costs for some businesses and bigger home-heating and gasoline bills for consumers each month.

According to government estimates, cap-and-trade, which is effectively a tax on consumers and businesses, will generate $1.9 billion in revenues annually, or about $150 per Ontarian ($600 per family of four). The Trudeau government will soon require that all provinces establish a minimum carbon price of $10 per tonne starting in 2018, rising to $50 per tonne by 2022.

While it’s not exactly clear how Ottawa’s new policy will interact with existing provincial carbon policies, Ontario’s cap-and-trade plan likely won’t go far enough to satisfy federal rules. This could mean another multi-billion dollar tax hike, imposed by Ottawa, on top of what’s already been announced by Queen’s Park.

Of course, raising Ontario’s carbon price to satisfy federal rules need not necessarily mean an increase in the overall tax burden on Ontarians. The province could theoretically reduce other taxes to completely offset the effective tax on carbon. Economists refer to this as a “revenue-neutral” approach, and some argue it can actually enhance growth if economically harmful taxes such as the corporate income tax are cut.

However, given that the province spectacularly failed to adhere to the principle of revenue-neutrality in its initial cap-and-trade plan, it’s hard to be optimistic that Premier Wynne’s government would enact the tax cuts needed to make a $50 per tonne carbon tax revenue neutral. As in other areas, the Ontario government’s approach to climate policy has been based on a tax-and-spend approach. It would be naïve to assume they will break from this pattern.

In the end, Ontarians will likely be hit with two effective tax hikes—one resulting from the provincial government’s cap-and-trade plan and the other from Ottawa’s newly announced carbon pricing scheme. It won’t be the first time. On personal income taxes, Ontarians have been hit by a double whammy of provincial and federal tax hikes.

Consider that between 2011 and 2014 Ontario increased its top marginal personal income tax rate (including surtaxes) from 17.41 per cent to 20.53 per cent. This year, the federal government added a tax hike of its own, raising the top federal rate by four percentage points. Due to the effect of these tax increases, Ontario’s top combined personal income tax rate rose from 46.41 per cent in 2011 to 53.53 per cent today, undermining the province’s economic competitiveness while adding to the overall tax burden.

Ontario’s economy has underperformed for years, partly as a result of policy choices from its spendthrift and tax-happy provincial government. In recent months, the federal government has gotten into the act, with additional tax hikes. The combination means less money in the hands of Ontario families and businesses, which is bad news for the province’s still-fragile economy.