On the eve of the Ontario budget, Federal Finance Minister Jim Flaherty again demanded that Premier Dalton McGuinty cut corporate taxes to help stimulate the provincial economy.

Federal Finance Minister Jim Flaherty told reporters in Toronto on Monday that he wants the Ontario government to cut corporate taxes to help stimulate the provincial economy.
(Frank Gunn/Canadian Press)

It's a call Flaherty has already made several times in the past month, sparking some bitter back-and-forth comments between himself and McGuinty.

"It's time for Ontario to step up in support of our businesses," Flaherty told reporters at a news conference before Tuesday's provincial budget release.

"Dalton McGuinty can't do anything about the rising price of oil or the high value of the Canadian dollar, but he can take action to reduce business taxes here in the province of Ontario."

Political analysts and historians were baffled at Flaherty's bold interference in provincial politics.

"I can't remember a previous precedent. It's so unusual I'm tempted to say it's unseemly," said historian Michael Bliss of the University of Toronto.

The only similar feud he could recall were frequent barbs exchanged between former prime minister William Lyon Mackenzie King and Ontario premier Mitch Hepburn in the 1930s.

Political scientist Nelson Wiseman, also of the University of Toronto, speculated that Flaherty's Conservative government must be hoping to escape blame for future economic woes.

"They see the darkening economic clouds on the horizon and they want to deflect attention from the federal government stewardship of the economy onto Ontario."

Flaherty unrelenting

Flaherty, a Conservative, said Monday that he won't stop his campaign, which has been brewing since he introduced his own federal budget last month.

He's written a letter telling McGuinty to focus on the economy, and he's publicly stated that Ontario is the "last place" in Canada to start a business because of its high corporate taxes and high taxes on new business investment.

His comments drawn strong criticism, with Liberal MP John McCallum accusing Flaherty of "trashing the investment climate of his own province" and "telling the world to avoid investing in Ontario."

Flaherty, a former Conservative finance minister in Ontario, defended his meddling on Monday.

"Lack of significant growth in Ontario affects the whole country, and that's a legitimate interest of the government of Canada."

'The debate makes it look like Ontario is out to lunch'

But some analysts disagreed with Flaherty's logic. Don Drummond, TD Bank's chief economist, noted that while Ontario's business taxes are high, particularly the 14 per cent corporate income tax, the provincial Liberals have done much to improve the business climate.

He noted that the Liberals' progress has come despite the province being handed a $5 billion deficit in 2003 by the outgoing Conservative government of former premier Ernie Eves.

"The debate makes it look like Ontario is out to lunch, and that's not true," said Drummond.

"McGuinty has cut corporate taxes by $3 billion a year, which is no small change. Ontario is phasing out their capital tax and taken a big chunk out of the provincial portion of property taxes, which are much more important to business than the corporate income tax."

Queen's University economics professor Tom Courchene said that contrary to what Flaherty says, Ontario's recent economic woes have more to do with oil than taxes.

"Ontario was a have-not province for five years between 1977 and 1982, and the reasons then are the same as the reasons now — it was the time of the first energy price shock and Alberta's revenues went sky high," he explained.

Drummond said it appears Flaherty's finger-pointing may be getting to Ontario Finance Minister Dwight Duncan.

"I think Ontario was going to cut its corporate income taxes, but now it would look like it was caving in to federal pressure and it's not going to do it," he said.

Ontario needs federal help, McGuinty says

For his part, McGuinty has defended the province, saying it needs federal help to cope with tough economic times, not "unacceptable" criticism from Flaherty, who may be discouraging business investment.

Last December, the Ontario government eliminated its capital tax on resource-based industries, including manufacturers, McGuinty has noted. Ontario has a comprehensive plan that includes not only lowering business taxes but also investing in health care, education, infrastructure and business partnerships, he has said.

The premier says Ontario needs the help of the federal government as it copes with a downturn in its manufacturing and forestry sectors. Economists have suggested that if the U.S. dips into a full-blown recession, the impact will be felt the most in Ontario and Quebec.

With files from the Canadian Press