Ontario's Bold Move to Create Jobs and Growth: Impact of the 2009 Ontario Budget and Other Recent Tax Measures on Investment, Jobs and Incomes

Abstract

• The 2009 Ontario Budget measures, together with other recent tax changes, will have a profound impact on Ontario’s competitiveness by lowering the tax burden on new business investment.

• Within ten years, Ontario will benefit from: – increased capital investment of $47 billion; – increased annual incomes of up to 8.8%, or $29.4 billion; and – an estimated 591,000 net new jobs.

This paper documents the impact of the 2009 Ontario Budget and other recent tax changes on capital investment, jobs, and incomes in the province.

In the March 2009 Budget, Ontario announced it will harmonize its sales tax with the federal goods and services tax (GST) as well as reduce corporate and personal taxes. The Budget measures will have a profound impact on the willingness of business to invest in Ontario since corporate tax rate reductions and the adoption of the federal GST base would result in the virtual elimination of taxes on capital goods and business intermediate inputs once fully phased in. Since 1980, when I began modelling the impact of taxes on investment, this is the largest change ever seen in a single budget, leading to the sharpest reduction in the tax burden on capital investment in any one province. Coupled with federal reductions in corporate taxes and Ontario’s already legislated elimination of all remaining capital taxes,1 Ontario will see its effective tax rate on new investments by medium and large businesses plummet from 33.6% in 2009 to 23.7% in 2010 and then to 18.5% by 2018. The province will then have an effective tax rate on non-resource investments that is similar to most other provinces, including Alberta, British Columbia, and Quebec. Ontario will also improve its international competitiveness dramatically with a lower tax burden on new investment compared with the average of 20 major industrialized and emerging economies.

Small businesses will also benefit substantially from the 2009 Budget. The effective tax rate on small business investment will fall by more than half, from 28.6% to 13.3%, due to the one percentage point reduction in the corporate tax rate and sales tax harmonization. Sales tax harmonization will have a large impact since the Ontario retail sales tax especially hurts investment in machinery that Ontario’s small businesses use intensively.

Within ten years, the lower tax burden on investment will lead to increases in capital investment of $47 billion and in annual incomes of between 4.4% and 8.8%, and to the creation of an estimated 591,000 net new jobs.