Ontario's Tax Plan for Jobs and Growth: How the Tax Changes Affect People

Tax Plan for Jobs and Growth

• With the support of the federal government, move to a single, value-added tax on July 1, 2010
  • Combined Harmonized Sales Tax (HST) rate of 13% — Ontario's portion will be 8% (current PST general rate), federal portion is 5% (current GST rate)
  • Broadens the tax base but eliminates a $4.5B annual tax on business purchases and cuts compliance costs by more than $500M a year
• Provide over $4.6B in tax relief for large and small businesses over three years, not including the elimination of the capital tax or business education tax rate cuts
• Provide $11.8B in tax relief to people over three years

Context for Action

• Ontario's Tax Plan is essential to strengthening Ontario's competitiveness, attracting investment and creating jobs
• Some of our advantages — low dollar and strong U.S. economy can't be relied on
• With an aging population and increased global competition, capital investment and productivity growth are even more important for future prosperity
• Four Canadian provinces and more than 140 countries have a similar value-added sales tax system
• These reforms cut the tax on new business investment in half, making Ontario one of the most attractive locations to invest in the industrialized world

A study by economist Jack Mintz estimates that, within ten years, the benefits to Ontario from the lower tax burden on new investment will be $47 billion in increased capital investment, almost 600,000 net new jobs and higher annual incomes

Tax Relief for People

To support Ontario families, the province is providing $11.8 billion in tax relief for people over three years:

• Personal Income Tax (PIT) rate cut of over $1.1 billion annually
  • 93% of income tax payers are benefiting from a PIT cut on January 1, 2010, averaging about $200 a year. About 90,000 lower-income tax filers no longer pay Ontario PIT
  • Ontarians now benefit from the lowest provincial tax rate in Canada on the first $37,106 of taxable income
• Enhanced Ontario Energy and Property Tax Credit & Sales Tax Credit
  • Will provide more than an additional $1.2 billion in enhanced tax credits to low- to middle-income individuals and families annually
  • Sales tax credit will provide up to $260 a year for each eligible adult and child
• Ontario Sales Tax Transition Benefit of $4.2 billion
  • Eligible families, including single parents, with adjusted family net incomes of $160,000 or less, will get three payments totalling $1,000
  • Eligible single people with adjusted net incomes of $80,000 or less will get three payments totalling $300

Description of Methodology

• Ministry of Finance's analysis uses a comprehensive personal income tax and benefits model that contains income tax, property tax and benefits data on 5.3 million Ontario households
• To estimate sales tax impacts, the model was augmented by Statistics Canada's Social Policy Simulation Database & Model (SPSD/M) data, which breaks out household spending by 48 expenditure categories
• Using statistical analyses, the spending profiles from the SPSD/M (which contains a sample of households) were mapped on to each of the 5.3 million households
• To supplement the analysis, the sales tax impacts on home purchases and major renovations (which are not included in the 48 expenditure categories) were allocated across households using property tax assessment data and Statistics Canada's Survey of Household Spending
• To estimate the pass-through of business savings, Statistics Canada data was used that allows for the allocation of business savings to non-business final users: government, exports and Ontario households across the 48 expenditure categories and housing
• The estimated benefits from the personal income tax cut, enhanced tax credits and transitional payments were calculated for each Ontario income tax filer, then rolled up to the household level
• Years 1 & 3 were chosen to illustrate the impact on families with and without the temporary transitional benefits

Key Modeling Assumptions

• In modeling the affects of the tax changes on households, the Ministry of Finance used cautious assumptions:
  • Even though these changes take effect in 2010, the tax relief benefits exclude enhancements to the Senior Homeowners' Property Tax Grant (up to $250) and the proposed Northern Ontario Energy Credit (up to $200 for Northern families)
  • Pass-through of business savings is assumed to be slower than when the Atlantic provinces harmonized with the GST and other estimates provided by third-party economists (See Table)
  • No income growth was included even though Jack Mintz estimated significant increases to incomes as a result of the Tax Plan

Estimates of Pass-Through of Business Savings

Time Period	Ministry of Finance Modelling Assumption	TD Bank	Bank of Canada	HST in Atlantic Provinces	Centre for Spatial Economics	Consumer and Corporate Affairs Canada (1992)
Year 1	20%	80%	100%	60%-100%	50%	Most
Year 3	90%	95%			100%

How the Tax Plan Affects People

• While Ontarians will benefit from more jobs and investment, Ontario's portion of the HST will apply to a broader range of goods and services that are already subject to the GST
• The tax status for the provincial portion of the HST will not change for 83% of total consumer spending. For the 17% that will change, Ontario is cutting income taxes, enhancing tax credits and providing temporary tax relief
• Overall Ontario's tax system will be more progressive — people with lower income will pay less; middle income will pay about the same; and higher income will pay somewhat more

Average Overall Annual (Saving)/Cost by Household Income

Income Bracket[1] ($)	Average (Saving)/Cost ($)
	Year 1	Year 3[2]
$4,000 - $40,000	(510)	(205)
$40,000 - $80,000	(435)	(25)
$80,000 - $125,000	(260)	200
$125,000 - $300,000	30	405
[1] Household income is the sum of pre-tax market income and includes provincial and federal transfers. Households with income below $4,000 or above $300,000 are not included due to sampling limitations. [2] Year 3 figures do not take into account the expected income growth resulting from the tax plan.

How the Tax Plan Affects People — Savings/(Cost)

Note: Excludes income growth from increased job creation and new investment. Households with income below $4,000 or above $300,000 are not included due to sampling limitations.

Average Annual (Saving)/Cost by Household Income Level

Annual Household Income[2]	Year 1			Year 3[1]
	HST[3] ($)	Total Tax Relief ($)	Overall Impact ($)	HST[3] ($)	Total Tax Relief ($)	Overall Impact ($)
$4,000 - $20,000[4]	265	(685)	(420)	200	(365)	(170)
$20,000 - $30,000	350	(895)	(550)	255	(485)	(235)
$30,000 - $40,000	440	(1,025)	(585)	320	(535)	(210)
$40,000 - $50,000	515	(1,045)	(525)	385	(520)	(135)
$50,000 - $60,000	590	(1,035)	(445)	440	(480)	(40)
$60,000 - $70,000	660	(1,035)	(375)	490	(445)	45
$70,000 - $80,000	720	(1,065)	(345)	535	(440)	95
$80,000 - $90,000	780	(1,080)	(300)	580	(445)	135
$90,000 - $100,000	855	(1,115)	(260)	655	(455)	195
$100,000 - $125,000	945	(1,185)	(240)	725	(485)	240
$125,000 - $150,000	1,055	(1,265)	(205)	815	(520)	295
$150,000 - $300,000[4]	1,280	(1,095)	185	1,000	(520)	480
[1] Year 3 figures do not take into account the expected income growth resulting from the tax plan. The HST estimates include additional home purchases and renovations from year 1 to year 3, while the number of households is held constant. [2] Household income is the sum of pre-tax market income and includes provincial and federal transfers. [3] HST is net of pass-through of business savings. [4] Households with income below $4,000 or above $300,000 are not included due to sampling limitations. Note: Totals may not add due to rounding.

Other Studies

• Ministry of Finance estimates are consistent with other studies that show the net impact of the HST and permanent tax cuts is, on average, essentially neutral
  • A TD Bank report in September 2009 shows that the HST impact on people after the pass-through of business savings is fully or almost fully offset by the income tax cut and tax credit enhancements
  • A paper by Professor Ernie Lightman and Andy Mitchell of the University Toronto in December 2009 found that "the net combined effect of all the changes — new HST plus sales/property tax credits plus personal income tax reductions — is very close to neutral."
• Estimates are also consistent with case examples posted on the Ministry of Finance's website — ontario.ca/taxchange

Peer Review Comments[*]

• A draft of the paper was reviewed by several eminent economists: Don Drummond, Peter Dungan, Jack Mintz, Robin Somerville, Jim Stanford and Ernie Stokes

Don Drummond:

• "The Ontario Government's technical paper on sales tax harmonization is the most thorough examination of the effect of Ontario's tax changes on households to date. It unequivocally shows these changes are progressive and will not be at the expense of a higher overall tax burden on households, especially when the economic advantage of a more competitive economy is included. Finally, it quantifies the important benefits of the tax changes to Ontario's competitiveness. As global competition intensifies, particularly from emerging economies, the boost to competitiveness can't come soon enough."

Jack Mintz:

• "This is a carefully done study on the impact of the HST reform on Ontario households. Despite relatively conservative assumptions regarding pass-through effects of eliminating sales taxes on business inputs on consumer prices, the study shows overwhelmingly that Ontario residents will be better off with the reform.
• HST and income tax reform measures are a slam-dunk for the Province. Ontarians, especially at the low-income level, will benefit. But so will the rest of country as tax reform will reduce costs for other parts of Canada with more competitive Ontario businesses."