Raise Corporate Taxes To Slay Ontario’s Infrastructure Deficit: An Alternative Policy Proposal

The province of Ontario currently faces a significant public infrastructure deficit which is harming its economic productivity and its quality of life. The government’s own numbers estimate that deficit at “tens of billions of dollars.”[1] Some media reports have pegged the number at times in excess of $100 billion.[2] I propose a new policy paradigm of increased and creative corporate taxation to help fund this infrastructure funding shortfall. To examine this policy recommendation, I will first place the issue in its historical and present-day context. I will then investigate several methods used to finance the curbing of infrastructure deficits. Finally, I will analyze each method and explain my policy recommendation.

Issue Background
This analysis adopts the provincial government’s definition of public infrastructure as that consisting of “highways, bridges, culverts, transit systems, schools, universities, hospitals, drinking water and wastewater systems, parks, and government buildings.”[3] Important implications flow from a lack of investment in crucial public infrastructure; among them are decreased economic productivity and heightened social ills. Firstly, emerging research is increasingly quantifying the toll Ontario’s public infrastructure deficit is taking on productivity. A 2013 briefing report by the Conference Board of Canada specifically connects the two issues: “[T]here is a high degree of interdependence between the quality and quantity of public infrastructure and the performance (productivity) of an economy’s business sector.”[4] Public infrastructure investments by the Ontario government between 2004 and 2014 were projected by the Conference Board’s report to lift “the province’s real productive capacity by 2.1 percent” and add “$1,044 (in constant 2012 dollars) to the average income per resident.”[5] In the Greater Toronto and Hamilton Area, the economic cost of the infrastructure deficit, vis-à-vis traffic congestion is estimated to be $6 billion each year.[6] That cost is currently expected to grow to $15 billion per year by 2031, according to projections by the City of Toronto.[7]

Secondly, increased traffic on overburdened roads has resulted in increased delays for people simply trying to get around the province. This, in turn, has had a cascade effect of further negative consequences for Ontarians, a 2014 Canadian Index of Wellbeing report tells us. The issue of intensified traffic gridlock “increases stress among commuters, reduces time available for other valued activities, and reduces business productivity,” the report notes. “It contributes to higher levels of pollution, especially in urban areas, and diminishes environmental quality, thereby jeopardising public health.”[8] This problem is particularly acute in the Greater Toronto Area, where the average commuting time is about an hour in length.[9]

Government investment into Ontario’s public infrastructure has come in ebbs and flows in the post-Second War era. At present, the province segments infrastructure investment into three eras: The “Era of Visionary Investment” (1955-1974), the “Era of Neglect” (1975-1999) and what it calls the “Era of Renewal” (2000-2009)[10] [see Chart 1].[11] The most recent figures public available show the province states that it has invested nearly $100 billion in public infrastructure since 2003.[12] The government claims this spending is significant stating, “the province has not seen this level of investment since the post-war era, when many of the foundations of our present-day infrastructure, including the 400-series highways and the Toronto subway, were first laid.”[13]

Province of Ontario, Building Together: Jobs & Prosperity for Ontarians (Toronto: Queen’s Printer for Ontario, 2011), iii.

However, the province expects that during the course of the next quarter century, it will “encounter diverse growth challenges”[14] which will ostensibly exacerbate the issues faced by the significant infrastructure deficit if it is not addressed before then.

Funding Schemes
Several mechanisms for funding infrastructure deficits have appeared in jurisdictions in Canada and abroad in recent years. Some have been highly controversial. Other projects have been widely discussed but remain primarily in the proposal stage. This section will investigate three such mechanisms: firstly, the privatization of public assets, secondly, various funding programs from the federal government to the provinces and finally, proposals to tax corporations at higher levels and/or more creatively.

A major plank of the current Liberal Party government of Ontario’s plan to fund infrastructure investment is the privatization of some public assets.[15] Among the planned privatizations is the eventual selling of 60 percent of Hydro One, a transmission and distribution utility.[16] The province expects to eventually “realize $9 billion in proceeds, $4 billion of which will be invested in infrastructure and $5 billion to reduce (provincial) debt”[17] (which is projected to be approximately $300 billion in 2015-2016).[18] The privatization, via the offering of shares of Hydro One on the Toronto Stock Exchange, began on November 5, 2015.[19] The Government of Ontario argues that this privatization scheme is good for the province because it will provide needed money and also introduce “private-sector discipline” which “(will) allow Hydro One to achieve operating efficiencies” while remaining under provincial regulation.[20] However, an October 2015 report by the Financial Accountability Office of Ontario flags the government’s plan as potentially counterproductive. While the initial privatization which began on November 5, 2015, and is estimated to involve 15 percent of the total Hydro One shares to be offered, is expected to “significantly reduce the Province’s deficit in 2015–16,”[21] by the time all 60 percent of Hydro One is privatized (estimated to be 2019-2020), “the Province (will) experience an ongoing negative impact on budget balance from foregone net income and payments-in-lieu of taxes from Hydro One.”[22] In other words, not only will tax revenues from a completely publicly-owned Hydro One not be available for reinvestment into projects such as infrastructure, the loss of that revenue may drag Ontario’s budget down. Whether this short-term gain versus long-term pain trend will be projected for all public assets the government may privatize is unknown at this time.

A second method of funding infrastructure used in Canada involves transfer funding from the federal government to the provinces. Several programs have been implemented since 2000 and a greater emphasis was placed on the role for the federal government in the funding of infrastructure, specifically municipal infrastructure, in the aftermath of a 2001 meeting in Winnipeg by mayors of the five largest cities in Canada. The mayors argued “for a ‘new deal for cities’ to ensure local communities could address pressing public concerns and ‘fundamental infrastructure needs’.”[23] The federal government currently states it plans to directly invest $11 billion in infrastructure funding in Ontario between 2014 and 2024.[24] The money will flow to Ontario, via Ottawa, after it is collected through two federal programs: the New Building Canada Fund and the Gas Tax Fund. Ontario is also projected by the federal government to potentially “benefit” from $4 billion worth of projects “of national significance”, $1.25 billion worth of funds for embarking on public-private partnerships and $10.4 billion in federal tax rebates.[25] Federal funding has the potential to be helpful to Ontario, to a certain degree, but the main drawback to the scheme is that various programs have not adequately offset the provincial infrastructure deficit to this point. In the future, any increases to such funding initiatives will also be contingent on political will on the part of the federal government of the day.

The final funding mechanism investigated here is various proposals to adjust corporate taxation to help offset the cost of the infrastructure deficit. A March 2015 report by the Canadian Centre for Policy Alternatives argues that Ontario has a significant “revenue problem”[26] and that in order to meet it its goals of infrastructure spending and debt reduction, it “must raise taxes.”[27] Among the taxes it advocates hiking is the joint provincial-federal corporate tax, which it states is “one of the lowest corporate income tax rates among developed and developing countries.”[28] Corporate taxes were slashed during the financial crisis which began in 2008-2009 in an attempt to encourage the private sector to spend. However, several reports indicate that attempted inducement was ineffective in achieving its desired goals. The result has been that huge pools of cash horded by Canadian companies are currently lying dormant. This total of this dormant cash, or “Dead Money”, as former Bank of Canada Governor Mark Carney called it[29], is now estimated by the Broadbent Institute to be approaching $700 billion.[30] Despite nearly a decade of an objectively favourable tax climate, companies in Ontario are among the least willing to spend in Canada and invest an average of only $7,000 per worker. That ranks Ontario companies second-lowest behind only Quebec which spends a mere $5,700 per worker.[31] Given all of this, the Canadian Centre for Policy Alternatives argues it is time for corporate rates to rise. “The failure of corporate tax cuts on their own to spur business investment, coupled with our competitive tax rates, means there is room to return the corporate income tax rate to 2009 levels,” the Centre notes.[32] Meanwhile, the United States government appears to be embarking on a unique program to seize untaxed income from American corporations. Some reports indicate that as much as $2 trillion worth of American corporate profits are sitting in foreign accounts. President Barack Obama proposes to tax that money at a rate of 14 percent to help pay for infrastructure upgrades.[33] The amount of Canadian corporate assets held overseas in “tax havens” is estimated by Canadians for Tax Fairness to be approximately $200 billion.[34] If the Canadian government attempted a similar initiative to that of the Obama administration, the tax revenue windfall could be substantial.

Conclusions/Policy Recommendation
Ontario’s infrastructure deficit poses a significant challenge. Given the potential counterproductive nature of privatizing public assets, as flagged by the Financial Accountability Officer of Ontario, the decision to go down that path by the current government is concerning. As well, the failure of past federal-provincial infrastructure funding schemes demands a change of the status quo. Put bluntly, those funding initiatives simply have not in the past and are not presently addressing Ontario’s infrastructure deficit in a meaningful way. That any increases to those federal-provincial programs are contingent on political will is also a drawback. New thinking is required to deal with Ontario’s infrastructure problem. I recommend that the federal government move to begin taxing Canadian overseas corporate assets currently held in tax shelters and share those confiscated revenues with the province of Ontario under the condition that the money be used exclusively for infrastructure spending. I also recommend that the joint provincial-federal rate of Ontario corporate taxation be increased to 2009 levels immediately. Further increases of the rate also need to be considered. Ultimately, a more aggressive tone is clearly needed by government with the Canadian corporate sector, which has demonstrably not fulfilled its end of the low tax bargain since the financial crisis began.


 

[1] Province of Ontario, Building Together: Jobs & Prosperity for Ontarians (Toronto: Queen’s Printer for Ontario, 2011), http://moi.gov.on.ca/pdf/en/BuildingTogether_En.pdf (accessed on October 26, 2015), iii.

[2] Robert Benzie and Richard J. Brennan, “Liberals to force provincial government to have long-term infrastructure plans,” Toronto Star, November 7, 2013, http://www.thestar.com/news/queenspark/2013/11/07/liberals_to_force_provincial_government_to_have_longterm_infrastructure_plans.html (accessed on October 26, 2015).

[3] Province of Ontario, Building Together: Jobs & Prosperity for Ontarians, 4.

[4] Conference Board of Canada, The Economic Impact of Ontario’s Infrastructure Investment Program, April 2013, http://www.conferenceboard.ca/e-library/abstract.aspx?did=5425 (free registration required) (accessed on November 1, 2015), 2.

[5] Ibid., 1.

[6] Benjamin Dachis, “Cars, Congestion and Costs: A New Approach to Evaluating Government Infrastructure Investment,” C.D. Howe Institute, July 2013. https://www.cdhowe.org/pdf/Commentary_385.pdf (accessed on October 30, 2015), 2.

[7] City of Toronto, Deputy Mayor’s Roundtable On Gridlock & Traffic Congestion, February 2014, http://www.toronto.ca/legdocs/mmis/2014/ex/bgrd/backgroundfile-72899.pdf (accessed on October 30, 2015), 2.

[8] Canadian Index of Wellbeing, How Are Ontarians Really Doing?, 2014, https://uwaterloo.ca/canadian-index-wellbeing/sites/ca.canadian-index-wellbeing/files/uploads/files/ontarioreport-accessible_0.pdf, (accessed on October 30, 2015), 42.

[9] Ibid., 40.

[10] Province of Ontario, Building Together: Jobs & Prosperity for Ontarians, 9.

[11] Ibid., iii.

[12] Province of Ontario, Results-based Plan Briefing Book 2014-15, (Toronto: Queen’s Printer for Ontario), http://www.moi.gov.on.ca/docs/en/MOI-2014-15RbPBriefingBook-PartI-English.pdf (accessed on October 31, 2015), 6.

[13] Province of Ontario, Building Together: Jobs & Prosperity for Ontarians, iii.

[14] Province of Ontario, Results-based Plan Briefing Book 2014-15, 7.

[15] Province of Ontario, Building Ontario Up: Ontario Budget 2015, http://www.fin.gov.on.ca/en/budget/ontariobudgets/2015/papers_all.pdf (accessed on November 1, 2015), 73.

[16] Ibid.

[17] Province of Ontario, Hydro One Initial Public Offering Closes, (Toronto: Queen’s Printer for Ontario, 2015), https://news.ontario.ca/mei/en/2015/11/hydro-one-initial-public-offering-closes.html (accessed on November 5, 2015).

[18] Ontario Financing Authority, Province’s Consolidated Debt Portfolio, http://www.ofina.on.ca/borrowing_debt/debt.htm (accessed on November 1, 2015).

[19] Province of Ontario, Hydro One Initial Public Offering Closes, https://news.ontario.ca/mei/en/2015/11/hydro-one-initial-public-offering-closes.html (accessed on November 5, 2015).

[20] Province of Ontario, Building Ontario Up: Ontario Budget 2015, 79.

[21] Financial Accountability Office of Ontario, An Assessment of the Financial Impact of the Partial Sale of Hydro One (Toronto: Queen’s Printer for Ontario, 2015), http://www.fao-on.org/web/default/files/publications/FAO%20Hydro%20One%20EN.pdf (accessed on October 29, 2015), 1.

[22] Ibid., 4.

[23] Joan Grace, “Building from the Ground Up: Funding the Infrastructure Deficit in Manitoba,” Manitoba Law Journal 37, no. 2 (2014): 408.

[24] Government of Canada, New Building Canada Plan: Ontario, http://www.infrastructure.gc.ca/regions/on/on-nbcp-npcc-eng.html (accessed on November 1, 2015).

[25] Ibid.

[26] Kaylie Tiessen, “Fixing Ontario’s Revenue Problem,” Canadian Centre for Policy Alternatives, https://www.policyalternatives.ca/sites/default/files/uploads/publications/Ontario%20Office/2015/03/CCPA%20ON%20Fixing%20Ontarios%20Revenue%20Problem.pdf, March 2015, (accessed on October 28, 2015), 5.

[27] Ibid., 12.

[28] Ibid., 10.

[29] The Economist, “Dead Money,” November 3, 2012, http://www.economist.com/news/finance-and-economics/21565621-cash-has-been-piling-up-companies%E2%80%99-balance-sheets-crisis-dead (accessed on November 1, 2015).

[30] Press Progress, “Corporate Canada is sitting on $680 billion, 85% of Canadians say raise corporate taxes,” Broadbent Institute, September 13, 2015, http://www.pressprogress.ca/corporate_canada_is_sitting_on_680_billion_85_canadians_say_raise_corporate_taxes (accessed on October 27, 2015).

 

[31] Benjamin Dachis, William B.P. Robson and Nicholas Chesterley “Capital Needed: Canada Needs More Robust Business Investment,” C.D. Howe Institute, July 2014, https://www.cdhowe.org/pdf/e-brief_179.pdf (accessed on November 3, 2015), 7.

[32] Kaylie Tiessen, “Fixing Ontario’s Revenue Problem,” 10.

[33] Jeff Mason and Kevin Drawbaugh, “Obama targets foreign profits with tax proposal, Republicans skeptical,” Reuters, February 1, 2015, http://www.reuters.com/article/2015/02/01/us-usa-budget-tax-idUSKBN0L51IX20150201 (accessed on October 29, 2015).

[34] Canadians for Tax Fairness, Canadian $$ in Tax Havens Reach $199 Billion,

http://www.taxfairness.ca/en/news/canadian-tax-havens-reach-199-billion (accessed on October 31, 2015).

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