Rebuild Tax System

Province's economy looks better in the rearview mirror than through the windshield
Toronto Star Mar 24, 2008  Hugh Mackenzie

Is the party really over?   When Ontario Minister of Finance Dwight Duncan rises at the traditional time of 4 p.m. tomorrow, there's a good chance he'll be delivering the last of the easy budgets – the kind that don't really require tough decisions.
Why? The finance minister will be spending the last of the easy budget surpluses before Ontario's finances absorb the full effect of an economic downturn.
Ontario's fiscal situation looks a lot better through the rearview mirror than it does through the windshield.

At the end of the third quarter of the 2007-8 fiscal year just ending, the government had reserve and contingency funds of $2.2 billion, including a capital expense contingency fund of $810 million. Because the budget is being delivered before the end of 2007-8, that money is available to fund this year's budget measures.
But don't look for a whole lot in the budget to be financed from next year's revenue because, unless all of the economists are wrong at the same time, Ontario's economic growth will be at best weak in 2008 and its revenue much less buoyant than it has been since the McGuinty government was elected in 2003.
So we should expect to see a budget that is front-end loaded with investments in infrastructure and with special "funds" created before the end of the fiscal year to finance future initiatives, but laden with messages designed to manage expectations for the coming year.
The crunch couldn't be coming at a worse time. The overdue bills left over from the Mike Harris era of Ontario politics are finally reaching the point where they can no longer be ignored.
The government boasts about having dealt with post-secondary education funding, yet Ontario still ranks dead last in Canada in per-capita funding for universities and in student-faculty ratios. Student debt continues to rise. There is more to be done on this file, and soon.
Thanks in part to the Mike Harris download, Ontario has the most dysfunctional provincial-municipal financial relationship in the country. With 38 per cent of Canada's population, Statistics Canada tells us that Ontario's municipalities account for 88 per cent of Canadian spending by local governments on housing; 95 per cent of local spending on social assistance; 84 per cent of local spending on health; and 68 per cent of property tax usage for purposes other than local government. It's not working. It needs fixing now.

Ontario's neediest citizens were used by Mike Harris to create one of the wedge issues that lifted him into power in 1995 and paid the price with a massive cut in benefits followed by an eight-year freeze. Shockingly, even with the increase in benefits that took place in November of last year, adults who depend on social assistance are worse off today, when inflation is taken into account, than they were when Dalton McGuinty was first elected in October 2003.
Pure ideology drove the elimination in the 1990s of the most successful affordable housing program Ontario has ever had. Despite growing waiting lists, increasingly obvious homelessness and the virtual absence of any new affordable housing construction in more than a decade, it has been a struggle even to get the McGuinty government to spend the federal housing money allocated to this province.
Child care suffered a similar fate in the Harris era and while it was highlighted as a priority in the first McGuinty election, it was essentially offered up as a sacrifice in the early days of the government's war with the Harper government in Ottawa. The issue may still live in the early years initiative, but right now there are still tens of thousands of Ontario families desperate to find affordable quality child care.
Perhaps the government's most active policy file has been elementary and secondary education. But substantial new funding for new initiatives hasn't masked the structural problems with the funding formula inherited from the Harris government.
For Ontarians, the cost of ignoring these unpaid bills is anything but abstract. The overdue bills from the Harris era represent needs that are unmet; investments that are not being made; economic and social potential that is not being realized.
If Ontarians hear anything on these issues in tomorrow's budget, it will be that the government feels their pain, but can't afford to do anything more.
Why? Because the biggest overdue bill of all – the dramatic loss of fiscal capacity due to $16 billion in Harris-era tax cuts – persists as the 800-pound gorilla in the room whose presence the government is trying to ignore.

The McGuinty government pretends that our fiscal constraints are like bad weather – something we can't do anything about. But Ontario once built a system of public services the envy of the world by identifying needs and raising the revenue needed to meet them.
We can do that again. It requires the minister of finance to use the dreaded t-word and rebuild a tax system that can support the services we need.
But that would require the government to be bold. And this government, to date, hasn't done bold.
So we won't hear anything on the big issues facing public services in Ontario, or anything on the emerging issue of the growing gap between those at the top of the income scale and the rest of us.
That's too bad, because these issues don't get any easier to resolve the longer they continue to be ignored.

Hugh Mackenzie is an economist and research associate at the Canadian Centre for Policy Alternatives.