CANADIAN MANUFACTURERS & EXPORTERS 2015 ONTARIO PRE-BUDGET SUBMISSION Date: January 29, 2015 Submitted To: Ontario Standing Committee on Finance and Economic Affairs
2 Canadian Manufacturers & Exporters (CME) is Canada s leading trade and industry association and the voice of manufacturing and global business in Canada. The association directly represents more than 10,000 leading companies nationwide. More than 85% of CME s members are small and medium-sized enterprises. As Canada s leading business network, CME, through various initiatives including the establishment of the Canadian Manufacturing Coalition, touches more than 100,000 companies from coast to coast, engaged in manufacturing, global business and service-related industries. CME s membership network accounts for an estimated 82% of Canada s total manufacturing production and 90% of exports. Manufacturing adds more total value to the Ontario economy than it does in any other province. Every dollar of manufacturing output generates billions of dollars in indirect impacts elsewhere in the province. No other sector generates as much secondary economic activity. The manufacturing sector in Ontario has underperformed the national average since the early- 2000s. However, there are emerging signs of a recovery. Ontario manufacturers made strong gains in the first half of 2014 and monthly sales have finally surpassed their pre-recession peak. The manufacturing and exporting sector continues be the largest business sector, with approximately $275 billion in annual shipments and nearly 800,000 direct jobs. Most of these jobs are highly skilled and highly paid. Another 1.2 million Ontarians are indirectly employed in manufacturing. Every dollar invested in manufacturing, generates nearly $4 in total economic activity, the highest multiplier of any major sector. Manufacturing and exporting is on the cutting edge of Ontario innovation. Manufacturing also accounts for 54 percent of all private sector R&D and over 80 percent of all new products commercialized in Ontario. Manufacturers success is Ontario`s prosperity. Manufacturers and exporters are generally optimistic about the future; however, a number of key challenges persist, threatening this favourable outlook. CME s recently released
3 management issues survey highlighted a number of pressing challenges that are constraining growth including; skills issues, regulatory impediments, and cost and reliability of energy supply. Ontario has made progress in improving the tax environment for manufacturing investment including the reductions to corporate tax rates, accelerated write-offs for M&P equipment, the elimination of the capital tax and the harmonized sales tax. With respect to corporate tax rates, Ontario is now on par with the OECD average at 25 percent combined (Federal & Provincial). However, these positive measures have been offset by other factors that are contributing to Ontario manufacturers lagging growth when compared to the rest of Canada. Meanwhile the recent drop in the value of the Canadian dollar is likely to provide a boost to exporters in the near term. However, given recent volatility it will be critical for manufacturers to remain vigilant on containing costs, improving productivity and continuous innovation. While a low dollar will benefit exports it will also make the purchase of new equipment more challenging since most are priced in US Dollars. The harsh lesson from the previous low dollar environment in the late 90 s and early 00 s is that many companies underinvested in equipment which made those companies less competitive when the dollar skyrocketed in price. Many companies went out of business or moved to the US as a result. Sustained investment in productive assets, innovation and the necessary training will be the key success factors for manufacturing this time around. Government can play an important role in supporting manufacturers throughout this low dollar period by maintaining and enhancing the competitive tax environment (no new taxes!) and developing a manufacturing strategy for the Province. In this context CME recommends the following areas of focus for budget 2015 under the auspices of making manufacturing a policy priority for government: 1. Business supports & incentives 2. Electricity rate competitiveness 3. The cumulative economic impact of legislation and regulation
4 Recommendations: 1. Business Supports & Incentives Increase incentives for research and development While many of the details have yet to emerge, CME is encouraged by the scope of the Jobs & Prosperity Fund (http://www.ontario.ca/business-and-economy/jobs-and-prosperity-fund) particularly support for building innovation capacity; improving productivity and increasing access to global markets. It will be critical for this fund to be administered in a way that is streamlined and provides maximum incentive to businesses to generate optimum results in each of these important categories. However, the current threshold of $10 million for eligible projects misses the vast majority of small and medium sized enterprises. CME recommends re-capitalizing the CME Smart Program with a focus on smaller innovation projects. It is critical that the definition the government uses to define research and development includes both new product innovation and process innovation. The latter is as important if not more important in terms of the impact on our quality of life and standard of living for Ontarians. Furthermore, the adoption and integration of new innovative technologies should be included in the definition of eligible research and development projects. The Jobs & Prosperity Fund should also consider grants for plant expansion and new construction. Recapitalize the CME SMART Program In 2008 the Ontario government made an investment in CME to design, develop and deliver a program that would help manufacturers improve productivity, particularly in the areas of lean, IT, and energy efficiency. We called this our SMART Program. This grant of $25 million dollars has allowed over 400 companies to implement a productivity plan at their facilities. This has ensured the retention and creation of thousands of jobs, and improved operations that are helping Ontario companies to better compete in the global marketplace. Given the success and
5 ongoing need, we hope the government will unanimously support continued investment in this program. Support for Skills Development and Talent Acquisition CME strongly supports the Canada-Ontario Jobs Grant which provides up to 35 percent of training costs to a maximum of $10,000, across a range of job classifications. We would encourage the government to work with employer groups to build awareness and streamline approvals for this important program. CME s 2014 Management Issues Survey, 56 percent of employers reported experiencing immediate skills shortages across all areas of their business. Most prevalent were engineering and technical skills as well as leadership and managerial skills. Given the magnitude of the skills shortage issue, a multifaceted strategy will need to be employed including highlighting the career opportunities associated with manufacturing, training consortia, maximizing immigration opportunities and working with the education system to better orient to the needs of employers. Monetization of Tax Credits In order to generate cash flow for companies that are not currently profitable (i.e. most in need of relief) or those that are looking to make significant new investments; the budget should make all new and existing tax credits refundable, effective January 1 st, 2015. During this low dollar environment, when companies need to invest, they require immediate cash support. If they are in a loss position they often cannot immediately benefit from tax credits. Making tax credits refundable will provide more effective stimulus for companies to sustain their investments in innovation throughout this period of economic challenge. Continue to Encourage M&P Investments CME further recommends that the Ontario Government continue to match the Federal government s initiatives to encourage manufacturing and processing equipment. CME is calling for both Federal and Provincial Governments to make the accelerated depreciation on Manufacturing and Processing Equipment permanent.
6 Property Tax Equity for Manufacturers Inequities in the Property Tax system are widespread in Ontario with industrial taxpayers bearing a disproportionate burden. A recent study by Walker Poole Nixon LLP analyzed industrial, commercial and residential tax rates across seven jurisdictions in Ontario (Brampton, Cornwall, Hamilton, St. Catharines, Thunderbay, Toronto, Windsor). On average, industrial rates were 35 percent higher than commercial rates and nearly 400 percent higher than residential rates. Whatever the historical rationale for levying these disproportionately higher rates to the industrial base clearly no longer has a basis. CME recommends that the property tax rates for manufacturing and industrial facilities be reduced to those of commercial establishments wherever such disparities persist. CME further recommends that MPAC assessments consider comparable properties outside of North America, particularly when considering very large or unique manufacturing properties. Failure to do so has lead to Ontario manufacturers being assessed at much higher levels than similar properties in other jurisdictions leaving Ontario manufacturers relatively uncompetitive. 2. Electricity Rate Competiveness Reduce electricity rates for all manufacturers Competitive electricity rates are fundamental to the success of Ontario s manufacturing sector and our economy. Despite progressive reforms including the demand based allocation of the global adjustment for large volume users, Ontario has among the highest electricity rates in North America. This issue is compounded by the fact that US States are offering significant incentive rates to attract and retain manufacturing investment south of the border. We also have a near term issue of surplus power during the spring and fall. To deal with the surplus, Ontario is selling off power at steeply reduced rates to neighbouring and competing jurisdictions. This surplus capacity challenge, and the bigger challenge of funding ongoing upgrades to our electricity infrastructure, would be exacerbated by further erosion of demand from the manufacturing. While Ontario has put in place the Industrial Electricity Rate Incentive program to deal with this issue, it should be further expanded to the broader manufacturing
7 sector. Rates during surplus periods should be offered to all Ontario manufacturers at lower rates to spur economic growth and improve system optimization. The only path forward for Ontario is to adopt a manufacturing action plan with an industrial/electricity rate as a core component. Ontario should provide immediate rate relief to Ontario manufacturers while continuing to reduce system costs to ensure sustainable rate competitiveness. There are a number of options available to achieve reduced rates for manufacturing & industry that would not adversely affect residential ratepayers. However, if we do not provide rate relief to spur manufacturing growth, their will inevitably be fewer ratepayers to fund the existing and planned infrastructure which can mean only one thing: higher rates for all. Energy is also a significant economic opportunity for Ontario manufacturers as suppliers for energy projects. We must find better ways to engage Ontario manufacturers in energy supply chain opportunities to ensure the benefits of these investments remain in Ontario. 3. The cumulative economic impact of legislation and regulation Streamline regulations and implement authentic consultation first approach to all new legislative initiatives CME has been supportive of the governments Open for business initiative which is working to improve the regulatory environment for businesses operating in Ontario. CME continues to encourage the government to focus on the impact that the regulation has on business and to address areas that are particularly onerous to businesses but do not contribute significantly to positive outcomes for stakeholders; and to consider other approaches that might produce equal or more positive results for all stakeholders. While Ontario has committed to applying economic impact testing to regulations on a go forward basis, the volume of legislation and associated burden continues unabated. Some examples of legislation that have been identified as being of particular or immediate concern include Bill 146: Stronger Workplaces for Stronger Economy Act; Bill 21: Leaves to Help Families Act; Accessibility for Ontarians with Disabilities Act, The Toxics Reduction Act, the Waste Diversion Act, Air Standards, Violence in the Workplace and the Green Energy Act. In each of these
8 areas the CME supports the overall intent of the initiative; however, we are concerned that the approach taken may add significantly to costs without having a significant impact on results and certainly not in terms of fostering an environment for attracting investment. CME recommends that the government adopt an authentic consultation approach that seeks input from stakeholders at the policy development stage, before legislation is developed and to accelerate the progress made under Open for Business and the Burden Reduction Reporting Act, 2014. Less Prescriptive Approach to Retirement Income Security CME supports efforts to increase income security for Ontarians in retirement. However, the current approach proposed under the Ontario Retirement Pension Plan would have negative consequences for the economy in the near term. Rather than mandatory contributions which will impact small and medium sized companies and their employees most, Ontario should look to tax incentives that encourage and enable companies to provide cost effective retirement benefits. In the alternative, the definition of comparable under the Ontario Retirement Pension Plan (ORPP) must recognize similar employer contributions to defined contribution (DC) programs or employee RRSP s. In pursuing the current ORPP model of mandatory employer/employee contributions, the government must implement offsets equal to or greater than the additional cost to employers to avoid adverse economic impacts. Offset opportunities may include direct tax credits or incentives, regulatory burden reductions, maintenance of the small business deduction on corporate taxes, or some combination thereof. One specific example includes maintaining the small business deduction limit on the first $500,000 of taxable income for companies. Eliminate HST Input Tax Credit Restrictions CME continues to be supportive of the harmonized sales tax and the implementation approach. However, we are concerned that the input tax credit (ITC) restrictions continue to be a constraint on investment and growth. Currently the ITC restrictions are scheduled to be phased-out by
9 2018. We would encourage the government to eliminate the ITC restrictions as quickly as fiscally possible. Carbon Pricing The Government announced recently that it would pursue a carbon pricing policy for Ontario. In pursuing this course, it will be necessary for Ontario to employ authentic consultation with industry to avoid unintended consequences for the economy. It will also be critical that Ontario not act unilaterally. Failure to act in parallel on a North American basis would put Ontario manufacturers at a significant competitive disadvantage. If proceeding unilaterally with a price on carbon, it will be imperative to fully offset the added costs to industry to avoid adverse economic impacts. Ontario needs to avoid a scenario in which higher costs to Ontario industry drives investment elsewhere where such costs don t exist. In this scenario we may fail to reduce GHG s and lose high paying jobs and manufacturing investment in the process. Other Priorities: CME has been consistent in our support for the comprehensive tax reforms that this government has implemented to date. The significant reductions in the marginal effective tax rate in Ontario will certainly improve the prospects for new and existing manufacturing investments in Ontario. We also know that the tax environment is not the only part of the investment decision. And we are concerned that regulatory and other business costs threaten to undermine the progress that has been made on the taxation front. There are a number of areas that CME has identified as areas of concern that cumulatively represent a real risk to the positives achieved in the previous budgets. Workplace Safety and Insurance Board: The Workplace Safety and Insurance Board s unfunded liability has grown again to approximately $12 billion. CME is calling on the government to establish a Royal Commission to review first principals upon which the WSIB was established and to identify what type of workers compensation system is needed to meet the needs of employers and employees in a way that is sustainable.
10 Conclusions: In conclusion, we appreciate the consideration of the Standing Committee on Finance and Economic Affairs in these matters and we look forward to furthering the dialogue on how to ensure a stronger manufacturing sector and a more prosperous Ontario. END Contacts: Ian Howcroft Vice President CME Ontario 905-672-3466 ext. 3256 ian.howcroft@cme-mec.ca Paul Clipsham Director of Policy & Programs CME Ontario 416-388-6711 Paul.clipsham@cme-mec.ca