Focused on austerity, the government appears to be ignoring tax policies that have the potential to bring in billions to the provincial treasury.
The ruthless slashing of public sector funding – including the current freeze on base funding to Ontario’s hospitals – appears to be more ideologically based than on sound economic policy.
As we have previously noted, cutting public spending also creates a fiscal drag on the economy. Public sector workers spend their earnings in the community, generating economic activity. When government puts the squeeze on them, it puts the squeeze on everybody by reducing economic growth.
We have seen how both the Harris and McGuinty governments reduced revenues by slashing the corporate tax rate. Less discussed are substantial exemptions to the Employer Health Tax (EHT), introduced in the late 1980s to replace the previous OHIP premiums.
When the EHT was introduced, it featured a graduated rate structure – the only one of its kind in Canada. For employers with annual payrolls of less than $200,000, the rate was 0.98 per cent. For employers with more than $400,000 in payroll, the rate increased to 1.95 per cent.
In the late 1990s the Harris government changed the structure again, giving a blanket exemption on the first $400,000 of payroll. Pitched as an assist to small business, the majority of the benefit – 54 per cent – went to larger businesses, or those in excess of $400,000 in payroll.
Late last year economist Hugh Mackenzie prepared a paper for the Ontario Health Coalition, showing this exemption cost the provincial treasury $2.33 billion in 2009-10. The cumulative effect from both the initial exemptions and the broader Tory exemptions to the EHT amounts to a whopping $33 billion from 1990-91 to 2009-10. That would put a sizeable dent in the provincial debt.
Mackenzie argues that as an assist to small business, the EHT exemption was a poorly targeted one. Payroll is a poor indicator of the size of a business. The economist notes, for example, a business which contracts out a significant portion of its work and which pays its owners in the form of dividends could easily qualify as a small business for EHT purposes. He says professional practices also routinely structure themselves so that support staff are technically employed by a single purpose corporation owned by the partners. Lawyers, doctors and other professionals could be exempt from the tax under these rules.
Public Medicare is a huge cost advantage to Canadian business, yet the portion paid by the EHT has been sliding. When it was first introduced, the EHT covered 17 per cent of health care costs. By 2008-09 it was down to 13 per cent.
While simply eliminating the exemption would immediately raise about $2.4 billion, Mackenzie also models what it would look like with a modest increase to 2.5 per cent from 1.98 per cent. Combined with an elimination of the exemption on the first $400,000, it would have raised $4.3 billion more in 2008-09 and brought business contribution back up to 17 per cent. Last year Ontario finished the year with a $13 billion deficit. Had this modest plan been put in place, it would have reduced that deficit by about a third.
A simple and modest tax reform that would bring in a minimum of $2.4 billion annually is something Ontario Finance Minister Dwight Duncan should be looking at instead of making citizens wait even longer for basic health services.