McGuinty buys short-term stability, but at what cost?

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An Ontario government known for its ponderous approach to policy development has committed to a stunningly abrupt change to the province's tax system – one that will bring short-term political stability by preventing a spring election, but uncertain economic implications down the road.

Premier Dalton McGuinty was known to have significant reservations about raising tax on income above $500,000 by 2 per cent, as demanded by the provincial NDP. Those included complicating a tax system that his government has previously tried to simplify, and risking a form of "class warfare" that has recently been more common in the United States.

But less than 24 hours before a confidence vote on his minority government's budget, Mr. McGuinty announced that he would adopt the policy – insisting that all revenues will go toward the province's $15-billion deficit, and that the levy will disappear when the deficit does.

With polls having shown overwhelming support for the populist policy, it's unlikely to cause Mr. McGuinty's Liberals much immediate political damage, and could even give them a short-term boost. But as the province struggles to rebuild its economy, the decision will unsettle a business community already uneasy over the recent decision to cancel planned corporate tax cuts, and concerned about how the province will tackle its deficit challenges going forward.

It's not so much the tax itself that will cause that worry, as the timing and manner in which it has been adopted.

Some Canadian variation of the proposed "Buffett rule" south of the border has recently been gaining traction, with advocates pointing – as NDP Leader Andrea Horwath did – to the growing income gap between high-income earners and everyone else. Even on Bay Street, there is at least some support for opening a debate on new revenue streams to augment the spending cuts aimed at getting back to budgetary balance.

But few expected Mr. McGuinty's Liberals, who promised in last fall's election not to raise taxes, to move so quickly on that front. And there is little sense they satisfied all their own concerns – let alone those outside government – before pressing forward.

Some of those concerns, including about the dangers of overcomplicating the income-tax system, are purely practical. There has not been time to take a comprehensive look at how much tax "leakage," caused by high-income earners having added incentive to find ways around the system, would put a dent in the $470-million in projected revenues.Nor has there been much analysis of whether the extra hit – which by some calculations would actually add 3.12 per cent to the highest tax rate, because it would be applied before an existing surtax – could be enough to drive some rich Ontarians out of the province altogether.

Others are more philosophical. While the income gap is growing, the highest earners in Canada aren't seen to be getting the same free ride as in the U.S., particularly since the tax cuts brought in by George W. Bush. Nor is there the same perception that financial elites have been sheltered from an economic storm of their own making. So Mr. McGuinty, a conflict-averse and consensus-oriented Premier who has heavily courted the business world, would seemingly have preferred to let sleeping dogs lie.

To get past all that, the Liberals could normally have been expected to conduct an arduous outreach and consultation process. This is a government, after all, that has in some cases responded to Don Drummond's controversial review of public services by launching more reviews.

That Mr. McGuinty instead signed on to a major tax reform that wasn't even on the provincial radar four weeks ago – in order to appease an opposition party that might have let his government live on regardless – raises obvious questions of what is yet to come. Even if they believe the policy in and of itself is warranted, or at least relatively harmless, business leaders and potential investors will be left wondering what other populist concessions might be granted to keep the NDP happy at this time next year, or how else the government might abruptly decide to pay down the deficit.

The Liberals could reasonably argue that a spring election would have been far more destabilizing, since it would have jeopardized the implementation of various austerity measures in their budget. At a time when the markets and credit-rating agencies are watching closely, the short-term consequences wouldn't just have been political.

But if stability is the name of the game, the symbolism of what happened this week – if not the practical consequences – could have adverse effects long past Tuesday's vote.