Stephen Harper’s income-splitting plan would shortchange Ontarians: Cohn

Income-splitting is not merely unfair, but unaffordable. And unfathomably un-federal.

Thestar.com
Oct. 29, 2014
By Martin Regg Cohn

It’s not merely unfair, but unaffordable. And unfathomably un-federal.

Not to split hairs, but income-splitting is perhaps the most indefensible and insidious campaign gimmick ever conjured up by Prime Minister Stephen Harper.

It’s not just a bad tax break. It’d be a bad break for Ontarians in particular, who would pay the highest price for a discriminatory Tory ploy that could make the rich richer and the poor poorer while impoverishing the province.

As originally conceived, Harper’s plan would disproportionately punish Ontario’s Liberal government - bleeding more than $1 billion from the provincial treasury because of rules that require Queen’s Park to go along with federal tax breaks. By contrast, it would give virtually a free pass to Harper’s base in Alberta, where a loyal Tory government would lose nary a penny in the deal.

That explains the angry letter Ontario Finance Minister Charles Sousa has just fired off to his federal counterpart, Joe Oliver, demanding compensation for Queen’s Park if Ottawa were to impose “unilateral actions that hinder Ontario’s ability to balance our budget.”

It also explains why Harper should be having second thoughts about causing Ontario double trouble. In Toronto Thursday, the PM is expected to move ahead with income-splitting in some form.

But why are the federal Conservatives even meddling in the realm of income redistribution, rewarding their traditional notion of the nuclear family at the expense of everyone else? Today’s Tories never met a tax break they didn’t like.

Income-splitting is highly targeted to Harper’s base. Typically, it would reward stay-at-home mothers married to wealthy hubby breadwinners. The effect is to split off the husband’s higher income, apportioning some of it to the no-income mom who pays a lower marginal tax rate.

The stated purpose is to reduce the couple’s shared tax burden. The unstated outcome, as revealed by independent think tanks, would be to benefit mostly high-income Canadians. The C.D. Howe Institute concluded that 85 per cent of households would get no benefit, while 40 per cent of the money would go to one-earner families earning more than $125,000 a year.

Harper promised in the 2011 campaign that he would implement his scheme - at an estimated cost of $2.7 billion in lost federal revenues every year - only after Ottawa had eliminated its budget deficit. Conveniently, that comes just in time for the upcoming 2015 federal election.

But at this time, the timing doesn’t make sense: The provinces are still far from debt-free, even if Ottawa is enjoying windfall revenues in a recovering economy.

Ontario’s budget is still burdened by a $12.5 billion deficit that won’t be eliminated until 2017-18. Yet under the terms of a joint tax-collection agreement, it is simultaneously required to mirror the ill-timed tax cuts mandated by Ottawa.

Even if you like income-splitting - and it’s hard to find many economists who think it’s a good idea - it is indisputably untimely, and hence unaffordable. For the provinces that are being dragged kicking and screaming by Ottawa, income-splitting is creating a fiscal split in the federation.

As Sousa complains in his letter to Oliver, the annual $1 billion loss that he calculates it will cost his treasury “disproportionately impacts Ontario’s revenues as compared to other provinces.” That’s because Ontario has a relatively progressive income tax system that hits high-income earners harder, and is easier on low-income taxpayers. At the other extreme, Alberta’s flat tax system already benefits high-income earners, so splitting and redistributing income won’t affect provincial revenues.

Voila. Ontario’s Liberal government takes a $1 billion hit. Alberta’s Tory government emerges unscathed.

That might seem like a neat trick for Harper’s heartland in Alberta, but it’s no way to win friends in Ontario. With a Progressive Conservative leadership race underway in this province, where do the rival candidates stand on income-splitting at a time when Ontario plainly can’t afford it?

Do the more than 70 Conservative MPs in Ottawa, who endlessly hector Queen’s Park for running a deficit, believe it’s the right tax cut at the right time? The late Jim Flaherty didn’t think so.

Before stepping down as federal finance minister, Flaherty argued that income-splitting delivers little bang for the federal buck. As a former provincial treasurer, too, he understood that it made no sense to force Queen’s Park to forfeit another billion bucks that it doesn’t have.

The numbers don’t add up. Neither does the timing.