Thursday, March 26, 2009

I’d like to tax the world in perfect harmony…

Jim Flaherty may have just become Dalton McGuinty’s new best friend. More on that in second.

McGuinty brought forward his first recession budget today, joining virtually every other jurisdiction in the world by sending the province spiraling into deficit (including Newfoundland!). The bulk of the spending is on infrastructure - 32.5 billion over two years. If you're curious where everything else is going (and I know you're not), you can read the full budget here.

But let’s be honest – there's only one thing in this budget people will be talking about. And the word of the day is “harmonization”, after McGuinty’s pledge to harmonize the GST and PST in Ontario:

Ontario will also undertake major tax reforms, including a move to implement a harmonized sales tax that will combine the 8 per cent provincial sales tax with the 5 per cent federal goods and services tax. The move will save Ontario businesses $500-million in paperwork costs, Mr. Duncan said.

But it will also raise the price of many goods and services, including essentials such as gasoline, home heating oil, newspapers and coffee, said New Democratic Party Leader Andrea Horwath.

Harmonizing the taxes will add to “the burden of average families who need help the most and give that money to those that need help the least,” she said.

To cushion the blow of the tax changes, the federal government is providing the province with $4.3-billion in transitional funding over three years. Ontario will use the money to cut cheques totalling $1,000 to every family in the province that earns less than $160,000. Individuals who earn less than $80,000 will get $300.

This is certainly a risk. The broken promise on health care premiums was a giant target that John Tory failed to hit last election campaign – McGuinty has now drawn a giant target for the next Tory leader shoot at in 2011.

You can be sure that the “tax on everything” attack that buried Stephane Dion will be heard loud and clear across Ontario over the next two and a half years. But before we all pile on McGuinty for doing something which may turn out to be hugely unpopular, it is important to keep in mind the big difference between this and the Green Shift – primarily, that McGuinty is in power. A great policy that is politically toxic is useless to an opposition party because it will never see the light of day. A great policy that is politically toxic at least serves the greater good if it’s brought in by a government in power. After all, being in power is about bringing forward positive change – not just running for re-election.

So this raises two distinct questions:

1. Is this a great policy?
2. Is it politically toxic?

On the first question, most would tend to agree this is the right thing to do from an economic perspective (yeah, yeah, it's the National Post, but still...). And with counterbalancing measures, exemptions, and rebates in place, it likely won’t be too punitive on Ontario’s poor. It’s not the thing legacies are built on, but it’s solid policy.

As for its' toxicity? Well, anytime you mess around with tax shifting, there are risks. But, as the teaser said, McGuinty’s secret weapon in all of this may be his old foe, Jim Flaherty. McGuinty is doing exactly what Flaherty has asked for and, one presumes, the Finance Minister will be quite supportive of this. That certainly puts Flaherty's wife - and PC leadership candidate - Christine Elliott in a bind but, either way, it should provide McGuinty with some cover on this one. He'll still be vulnerable on the left, but with the federal Tories and most business groups onside, his rank flank should hold up.

Don't get me wrong - McGuinty will take a hit on this one. But, I don't think it will be a fatal one.

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  • McGuinty's real problem is the size of the deficit and his lack of vision. In 2011 nobody will care about tax harmonization and the recession will no longer be an issue.

    The issue will be Ontario's long-term economic decline because of over-reliance on declining industries. McGuinty needs to start dealing with that, or any recovery will be bittersweet. The 57 billion 5-year planned deficit sucks all the oxygen out of the room in terms on paying for major investments.

    By Blogger french wedding cat, at 11:49 p.m.  

  • In 2011, McGuinty can start cutting a tax on something to encourage spending and look like a hero. By then, a tax cut will be economically appropriate as it will encourage more spending, and politically appropriate just before an election, so don't carve up McGuinty's tombstone just yet.

    By Blogger kenlister1, at 1:13 a.m.  

  • "And with counterbalancing measures, exemptions, and rebates in place, it likely won’t be too punitive on Ontario’s poor."

    hmmmm, the really poor people I know aren't so good at finessing the part of the system which gets them rebates and exemptions, thats partly why they are so poor. Its your middle class, tax form fanatics that love these kinds of policies. This is actually a pretty brutal budget, punishing the poorest while giving business a deep tax cut, not too surprising the NaPost likes this, who needs Harris?

    By Anonymous Anonymous, at 1:38 a.m.  

  • Anon - exemptions will be set up so that you're just not taxed on the finessing required there. Ditto for the $1000 rebate cheques (that said, I'm generally not a big proponent of rebate cheques).

    By Blogger calgarygrit, at 9:16 a.m.  

  • H2H: I guess the argument McGuinty would make would be that the tax reforms should help Ontario businesses so doing this is in part to help the province's economy long-term. It's certainly more productive than just giving the cash out in the form of a subsidy to failling businesses.

    And I suppose the Green Energy Act is also partly intended to move the province towards some forward-looking industries.

    But, yeah, I do somewhat agree with your critique.

    By Blogger calgarygrit, at 9:18 a.m.  

  • great headline.

    By Blogger Pareta, at 10:11 a.m.  

  • Think of it this way.

    On July 1, 2010, at the start of most families' summer holidays and vacations, in the heat of busy tourist season, gas prices in Ontario will not only be rising due to summer market demand, but they'll be jumping 8-10 cents due to the HST. Electricity bills for A/C will also be jumping 8%.

    Pissed off families will have the winter to cool off, but wait, their natural gas bills are 8% higher.

    And to top it all off, working families are paying thousands of dollars more for houses.

    All this leading into the fall of 2011.

    By Anonymous Anonymous, at 12:23 p.m.  

  • Anonymous, taking NDP press releases from the 2007 election runs a risk of backfiring. Gas prices and housing prices collapsed when the bubble popped.

    Also, what the hell is a working family? Is it like the Swiss Family Robinson (though I think they had monkey butlers)? Is it working class people that have kids? Does it exclude families with stay-at-home moms? I know it is supposed to be loaded language, but it is also very imprecise language.

    By Blogger french wedding cat, at 1:53 p.m.  

  • The title of this budget should have been "Flaherty was right". Tax harmonization, cuts to the corporate tax rate and video today with McGuinty defending his budget by saying that we need to catch-up to 130 other countries (begging the question why are we so far behind).

    You'd think that things couldn't get any better for the Ontario PCs and then they ruin it by coming out against tax harmonization when they should be arguing that this should have been done years ago when Flaherty first started asking them to do it before the manufacturing sector got wiped out and unemployment shot up.

    It would make McGuinty deservedly wear at least part of this recession by making the province less competitive and less able to handle the downturn and everyone knows that McGuinty was stubbornly opposed to the tax reform package he just brought in.

    By Anonymous Anonymous, at 1:54 p.m.  

  • Calgarygrit,

    I agree with harmonization - I guess I just don't think it is too important. McGuinty's green plan is, unfortunately, quite unoriginal. Ontario is doing the same thing as many states, the US government, etc.

    The problem is that we get less wind than much of the US, and our population core is far away from the location of most of the proposed windmills. So even if we could generate cheap power, other places will have cheaper power, and be in a better position to export the technology abroad. Either way, because everybody is doing this stuff, there will be fierce competition, and lower profit margins.

    I think Ontario should replace oil/gas with nuclear plants. The CANDU was once export competitive, but a lack of investment in nuclear has withered away that advantage. Canada has the world's largest uranium supply, it has the educated workers needed for a nuclear industry, and it has the tough regulations necessary to prevent 3 mile Islands.

    The technology is still providing robust improvement - though new nuclear reactors haven't been build since the late 70's, the capacity of each reactor has increased 400% since 1979.

    Windmills are supposed to create jobs indirectly by reducing the cost of electricity in Ontario. Obviously, windmills would create very few jobs, beyond construction ones. Since wind power is presently more expensive than conventional power sources, this is based on a hope that the technology will eventually improve. Nuclear remains the lowest cost per kilowatt hour. It isn't without problems, but if any part of the world is rich in empty space in which to dump nuclear waste, it is Ontario.

    By Blogger french wedding cat, at 7:59 p.m.  

  • Hoser, I find that fascinating. I'm a big proponent of wind, but you raise an interesting point.

    I also feel that CANDU reactors seem to be pretty safe -- I don't feel frightened of them at all, I wouldn't be concerned if one opened up close by me (I mean other than the traffic of all the employees coming and going, and the protestors - those parts would suck) (and I'd move if a coal plant started construction nearby - gross). I think nuclear is worth more attention.

    By Anonymous Jason Bo Green, at 8:56 p.m.  

  • I read today that Freeman Dyson worked on a project to launch spacecraft into space with nuclear explosions, thinking he'd knock off two birds with one stone: extraterrestrial exploration and using up the world's nuclear weapons, he estimated 200 a trip or something.

    By Anonymous Jason Bo Green, at 8:58 p.m.  

  • Oh I'm a big nuclear proponent too - so no arguments with what you say.

    The GEA, for good or bad, just seems to be the thing McGuinty is going to try and make his "legacy act".

    By Blogger calgarygrit, at 1:51 p.m.  

  • The guy is definitely just, and there's no doubt.

    By Anonymous tablet pc android, at 2:26 p.m.  

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