A Taxing Situation

“Elected leaders and private sector leaders seem to have been tied together by the politicians’ acceptance of the ideology that the world must be dealt with through the prism of the market.”
– John Ralston Saul
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The municipality of Toronto, Canada, is currently attempting to cope with a funding crisis that has been growing for many years. According to the Audit Committee’s report of June 15, 2007, Toronto’s net financial liability is 2.29 billion dollars. At its meeting on April 23, 2007, Toronto City Council passed a $7.8 billion Operating Budget for 2007. About 5% of the budget, or 400 million dollars, is allocated to servicing the city’s debt. It is anticipated that the city will incur an additional 507 million dollars of capital debt in 2007. In order to offset this shortfall in revenue, municipal services have been reduced.

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Escalating costs in several areas of mandatory spending has left the city without enough money to pay for its existing programs. For now, City Council has opted to reduce spending in all of its departments, rather than eliminating specific programs or services. It is recognized that this plan of action is a temporary respite in dealing with the city’s fiscal imbalance, not a solution. Additional revenue will have to be raised if current levels of service are to be maintained. City councilors seem to agree that Toronto needs to increase economic activity in order to generate additional revenue. The prevailing opinion is that more businesses will establish themselves here in the city if their costs are lower than elsewhere and their profits are potentially higher. More business means more employment, more municipal user fees and more people paying taxes. To achieve this, City Council is lowering corporate taxes and user fees.

As outlined in its financial reports, City Council has launched the “Enhancing Toronto’s Business Climate – it’s Everybody’s Business” initiative. Its goals include “improving business cost competitiveness through reduced business taxes” in order to attract companies and their money to Toronto. As part of this initiative, there will be a phased-in “shifting of property taxes from the non-residential class to the residential class”. Fees for building permits on non-retail office, hotel and industrial developments will also be waived with the intention of stimulating economic development.

Council approved a property tax increase of 3.8% for residential properties and 1.26% for non-residential properties. Property tax is the city’s single largest source of revenue, more than 41% of total revenues in 2006. Residential and multi-residential property taxes comprise 59% of the municipal tax levy. With future increases, the tax burden on residential properties will grow.

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User fees in Toronto comprised 22% of the city’s total operating revenues in 2006. More than a third of this revenue was derived from water and wastewater charges. Residential and multi-residential consumers accounted for 53% of the city’s water consumption and 56% of user fee revenue derived from water and wastewater charges in 2006.

A restructuring of water rates will be implemented as of January 1, 2008. Restructuring will reduce industrial rates up to 19.9% while increasing residential rates by 2.9%. Council intends to reduce business rates an additional 10% over a phase-in period yet to be determined.

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Fiscal policies meant to promote business profitability already exist at both the federal and provincial levels of government in Canada. With the advent of the North American Free Trade Agreement (NAFTA) and the elimination of legal barriers restricting the international movement of capital, tax policies favouring business are almost obligatory for Canadian politicians if they hope to keep major corporations operating within their jurisdictions.

Just as Toronto has come to rely on residential property tax as its primary source of revenue, the Government of Canada now depends on personal income tax as its primary source of revenue. In 1961-62, 31.5% of federal revenue was derived from personal income tax and 20% from corporate income tax. By 2001-02, 47.3% of federal revenue came from personal income tax and 13.2% from corporate income tax. Revenue from excise tax and special levies, which includes the Goods and Services Tax (GST), is 20.8% of the government’s total income, about a third more than the amount derived from corporate income tax. Ontario’s primary source of revenue is also personal income tax, (25%), followed by retail sales tax, (18%), and corporate income tax, (12%).

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In 2005-06, the Government of Canada’s Net debt was 536.9 billion dollars. Interest payments to service that debt were 25.5 billion dollars, representing 16.2% of the government’s budgetary expenses for the year. Ontario is also in debt. Net debt was 141.9 billion dollars in 2005-06. Interest payments were 9.0 billion dollars, 10.7% of the government’s revenue for the year.

Politicians are acutely aware that they cannot continue to increase personal income taxes and user fees indefinitely. At some point this will have the same effect as overtaxing the corporate sector. As the purchasing power of consumers declines, economic activity in the marketplace is reduced and along with it, government revenue. Over regulation threatens to suffocate entrepreneurial initiative, while deregulation threatens to destabilize existing infrastructures on which our entire economy depends.

Due to a combination of wasteful spending, inflationary expenses and our political leadership’s reluctance to tax the corporate sector, funding for public services continues to fall short of that which is required. There has also been a corresponding decline in the quality of existing services. Simultaneously, the anticipated increase in revenue to be derived from a private sector unfettered by government taxation and regulation has not materialized.

Short-term alternatives have been found, however. These have consisted of selling off public assets, legalizing gambling and endorsing private charities. While the sale of public property has been a one-time boost to the public coiffures, legal gambling revenues have become an integral part of government budgets and locally sanctioned charities have grown steadily in their augmentation of under funded social welfare services.

Government sponsored gambling has become ubiquitous in the last decade. Billions of dollars in revenue is generated every year while hundreds of millions of advertising dollars are spent encouraging people to gamble.
There are now casinos in every Canadian province and the Yukon Territory – 31 in Ontario alone. Gambling on horseracing takes place in every province.
In 2004, Canadians gambled roughly 12.4 billion dollars on some form of government-run gambling activity. Lotteries accounted for 25% of all Net, non-charity gambling revenue, casinos 33%, video lottery terminals (VLTs) 23% and slot machines not in casinos, 19%.

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In 2006, the Ontario Lottery and Gaming Corporation (OLG) alone generated approximately 6 billion dollars of revenue and 2 billion dollars in net profit for the Province of Ontario, more than twice that of the Liquor Control Board of Ontario.

A side effect of this lucrative economic activity has been the creation of “problem gamblers”. Serious financial, emotional, health and relationship problems have been attributed to problem gambling and are growing along with the industry. The OLG now spends 2 % of its net profits annually on programs established to help problem gamblers. To date, about 113 million dollars has been allocated to the Province’s Problem Gambling Programs. In 2002, roughly 1 in 20 Canadian adults were at risk of experiencing a problem with gambling or were problem gamblers. In 2003, roughly 3/4 of Canadians aged 18 and over reported that they had spent money gambling in the previous year.

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A study in 1999 recommended more law enforcement funding to investigate the burgeoning phenomena of organized crime involved with legal gambling. Authorities have become aware that legal casinos and racetracks are prime money laundering sites for organized crime.

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In 2002 donations to registered charities in Canada approximated 17 billion dollars. Ontario accounted for more than half of all charitable gifts donated in Canada.

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The City of Toronto relies on several professional charity organizations to help feed and house its poorer residents. Among the largest are The United Way and The Salvation Army, The Daily Bread Food Bank and Second Harvest. All of these organizations are expanding.

Only a fraction of the recipients of their charity are considered indigent. In 2005, The Salvation Army Gateway served close to 120,000 meals. According to The Daily Bread Food Bank, 175,000 people access food relief programs every month in Toronto – more than 66,000 are children. Second Harvest provides food for 13,000 meals a day, with 40% of their recipients being children.

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The number of poor neighbourhoods in Toronto continues to increase. In 1981, there were 30 “higher poverty” neighbourhoods; in 2001, there were 120. Higher poverty neighbourhoods are defined as having at least 26% of their residents living below the poverty line, twice the national average. The rate of family poverty in Toronto is 19.4%, compared to 12.8% for Canada as a whole.

The United Way Toronto provides financial support for 200 social and health service agencies across the city every year to assist youth, newcomers to Canada, homeless people and abused women. Poverty, lack of affordable housing and domestic violence are the social issues they most often address. Toronto donors to the United Way gave 106.8 million dollars in 2006.

According to the Offord Group consulting organization, Canadian hospitals are increasingly dependant on charitable donations to function. The Sick Kids Hospital Foundation is raising more cash than ever before. Fundraising revenues are up from $45 million in 2003-04 to $71 million in 2005-06.
Nicholas Offord’s presentation at the Association of Health Care Philanthropy Conference in May of 2005 also showed that of the 1.8 billion dollars raised by hospital charities in Canada, 32% was raised in the Greater Toronto Area (GTA).

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It would appear that the philanthropy of individuals in Ontario has not been deterred by an increasingly onerous tax system.

In 2004, Canadian corporations declared record profits of 204.5 billion dollars. As of February1, 2006, Export Development Canada estimated that overall Canadian corporate profits were growing at a 15% rate annually. While this was far from universal, profits were up strongly in the energy sector (67%) and in mining (48%). In construction the profit growth rate was 5% and in finance 4%. In the manufacturing sector the profit growth rate margin was running at about 6%, equal to its average over the past 15 years. Hourly wage increases have averaged less than 3% a year since 1999.

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Yet government subsidies to corporations persist. In 2004, now Prime Minister Stephen Harper vowed that a Conservative Government would “get out of the grants and subsidies game”, but Industry Canada alone continues to dispense an average of 1 billion dollars a year to various businesses. Since 1982, (when Industry Canada started keeping itemized records), the federal government has authorized 18.4 billion dollars in “grants, contributions, concessional financing and other forms of federal assistance.”

The largest beneficiaries have been Pratt & Whitney, ($1.5 billion), Bombardier, ($745 million), General Motors, ($360 million) and Bell Helicopter, ($338 million). Familiar names among the top fifty companies receiving grants and subsidies are Honeywell, ($207 million), Ford, ($104 million), Rolls Royce, ($87 million), Inco, ($60 million), Hyundai, ($55 million), IBM, ($33 million), General Dynamics, ($28 million), Goodrich, ($23 million), Lockheed Martin, ($20 million) and Magna International, ($18 million).

Ontario Premier Dalton McGuinty has pursued an economic policy towards the automobile industry meant to encourage growth and job creation. Since 2005, the province has invested more than 667 million dollars in Ontario auto manufacturers. General Motors received $235 million, Ford $100 million, DaimlerChrysler $76 million, Toyota $70 million, Navistar Truck and Engine Corporation $32 million and another $154 million went to Honda in 2006. Ontario’s plans for the automotive industry also include financial aid to the auto parts sector, another 50 million dollars. In addition, the McGuinty government initiated a five-year, 3.4 billion dollar road improvement program to “support Ontario industry by providing an efficient transportation system upon which their goods can safely travel”.

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Since then, DaimlerChrysler announced it would eliminate 13,000 jobs in the U.S. and Canada while putting their Chrysler division up for sale. In November of 2005, General Motors declared it would cut 30,000 jobs across North America by 2008. As recently as August 2007, GM announced the elimination of 1,200 jobs in Oshawa, Ontario.

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Premier McGuinty visits GM auto plant in Oshawa, September 2007.

Simultaneously, other public infrastructure programs are being neglected. For example, Ontario’s Energy Minister at the time, Dwight Duncan, announced that the provincial government would not be spending the money required to install anti-pollution equipment on the remaining four coal plants producing electricity in Ontario. As reported by Murray Campbell in the Globe and Mail newspaper on Wednesday, April 25, 2007, it was estimated that the cost could be up to 1.6 billion dollars. By the McGuinty government’s own estimates, the sulfur and nitrogen gas emissions from these power plants are responsible for hundreds of premature deaths and thousands of hospital admissions and emergency room visits for respiratory ailments annually, but Mr. Duncan stated in legislature that the government “will not be distracted by half measures, however well-intentioned they might seem”. His reasoning for taking this position is that current technology available for reducing toxic emissions from the coal plants does not reduce carbon dioxide emissions, a greenhouse gas, and therefore the government is “not going to spend 1.6 billion on technology that doesn’t help climate change”, since they intend to shut down the coal plants eventually. In April 2005, the Liberal government was pledging to shut down these coal plants by 2007 “come hell or high water”. A year later the target was readjusted to 2014. The quality of our air was a public health crisis for the Liberals during the provincial election of 2003; now that they hold office it has become just another budget consideration.

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Infrastructure problems currently overwhelming the city of Toronto are described in the 2005 Financial Report and 2006 Budget Summary (p.10):
“The City’s road network, the majority of which was constructed in the 1950s and 1960s, is in need of major repair and rehabilitation. The City’s water and wastewater network is similarly aged – 50 per cent of the water pipes and 30 per cent of wastewater pipes are more than 50 years old, while seven per cent of water mains and three per cent of wastewater infrastructure are more than 100 years old. Due to fiscal constraints, the City’s current spending in the capital program is less than ideal. Insufficient funding to the state of good repair for all programs has created backlogs worth hundreds of millions of dollars. In addition, capital requirements resulting from population growth and demographic changes further exacerbate capital under funding.”

The statistics illustrate a disturbing paradox in government policy.

Politicians are attempting to maintain our society’s prosperity through a sustained economic growth in the private sector. To achieve this governments are reducing their existing corporate tax base in the hope that this will stimulate economic activity that will translate into more jobs and an increase in aggregate revenues. This hope is in stark contrast to the fundamental belief prevalent among contemporary “captains of industry” that says companies profit by employing the least possible number of workers at the lowest possible wage. It is estimated that Ontario has lost up to 175,000 high-paying jobs in manufacturing and forestry in the last four years. According to the Canadian Manufacturers and Exporters (CME), Ontario lost 49,300 manufacturing jobs last year alone. This migration of jobs from the province is not the result of corporate losses, but a desire by managers to shift production to locations where labor is cheaper and profits are larger.

Even if successful, these economic policies do not take into consideration that there are limits to our potential for growth, both economically and environmentally. There does not appear to be a plan in the works on how to deal with the situation when we reach these limits. Our population continues to grow and so does the strain on our communal resources, which are diminishing proportionally.

Immigration to Canada has been growing annually, from 214 thousand per year in 1997 to 251 thousand in 2006. Half of these new Canadians settle in Ontario, primarily in the GTA. Social services must be increased every year to adequately accommodate their needs. More electricity, buses, housing, health care and recreation centres are required if our cities are to be sustained. More waste and pollution will need to be dealt with.

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Conserving available funds where possible is always preferable to additional taxation. Rationalizing current public services and making their delivery more efficient would serve this purpose admirably. Politicians also need to stop wasting public money by using it as a bribe to buy the support of special interest groups at election time. Using public funds wisely, however, is only part of the equation – first the money must be obtained. To this end, citizens, both private and corporate, should always be expected to pay a fair share of their community’s operating costs. If current trends in taxation are not reversed and fiscal reforms not instituted, our only alternative really will be rolling the dice and hoping for the best. And everyone knows that the problem gambler’s last roll of the dice is always a losing one.

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5 Responses to “A Taxing Situation”

  1. Where the subsidies go « Stephen Rees’s blog Says:

    […] on, but as usual I got distracted, first by a libertarian grandma in Texas, and then a post from “Nixon is in Hell” about taxes, which starts in Toronto and fans outwards Yet government subsidies to corporations […]

  2. Cipriano Says:

    Very interesting blog.
    I am chagrined about our recent re-election of McSquinty.
    But what the hell are [were] the options?
    Thank you for providing an intelligent, thoughtful blog, dealing with our current times!
    You are going to HATE me for this, but….. it is the foirst year I did NOT vote.
    At all.
    In my life!
    I know. I have no right to talk. Or complain.
    But, I DO have a right to read. Still.
    When that right is taken from me, I will be on my balcony rail, waiting for the slightest breeze.
    — Cip

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    A Taxing Situation | Nixon is in Hell

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