Higher corporate tax rates will make Ontario less competitive, the Investment Dealers Association warns in its pre-budget submission to Ontario government.

“The corporate tax increase and rollback of scheduled reductions of the Fiscal Responsibility Act will make Ontario’s tax regime increasingly less competitive in comparison to other jurisdictions,” the IDA says.

“It is also important to recognize that mobility of capital is not restricted to jurisdictions that border on the province of Ontario. Accordingly, Ontario needs a fiscal regime that retains and promotes investment and employment in the province, not one that encourages the migration of capital to other jurisdictions.”

The IDA argues that the province can grow the tax base by pursuing a more competitive corporate tax regime, “that will ensure fiscal balance while sustaining the important program priorities of the present government”. It says that the government’s current plans, “may impair the competitiveness of the provincial economy to attract productive job-creating investment and may have an adverse impact on economic growth and tax revenues.”

It calls for the government to repeal the planned corporate tax increases and restore the earlier-planned cuts.

Under the Fiscal Responsibility Act, the general corporate income tax rate is increased from 12.5% to 14%, and the manufacturing and processing tax rate is hiked from 11% to 12% effective Jan. 1. The tax rate for small business with incomes below $400,000 will remain at 5.5% for 2004 and subsequent years, instead of declining to 4% by 2005, as announced in 2003. And, it has abandoned planned reductions of the general corporate rate to 8% by 2006, and capital tax rate reductions.

Apart from arguing for more competitive tax rates, the IDA is particularly concerned about the capital tax.

“The IDA is disappointed that the government has cancelled the budgeted 10% reduction in the capital tax, and the subsequent planned elimination of the tax to match the phase out of the federal capital tax. It is well accepted that capital taxes are a counter-productive form of taxation that should be eliminated,” it says. “Capital taxes are profit-insensitive, taxing the capital base that financial institutions are required by regulation to maintain to protect against risk and to ensure financial strength and stability. Capital taxes are a tax on capital accumulation, and therefore are a disincentive for new investment. The federal government will eliminate the federal capital tax by 2008, and Alberta does not have one at all.”

On the small-business tax rate, the IDA says that scrapping planned cuts, “… will only act to preserve a competitive disadvantage for small businesses in Ontario that, over time, will erode innovation and business investment in our province.”

The IDA points out that Ontario’s Task Force on Competitiveness, Productivity and Economic Progress agrees with its’ view. And, it notes that other research shows that Ontario’s business sector is not competitive relative to jurisdictions in the US (such as Michigan, Massachusetts, Illinois, Georgia and California).