Commission on the Reform of Ontario's Public Services

Bill 186 measures, in combination with additional enforcement tools and approaches,
including partnerships with key stakeholders, could result in increased revenue of up to
$225 million per year when fully phased in.
Tax Value, Not Volume
Taxes on many so-called “sin” goods, such as gasoline, diesel, tobacco, beer and wine, apply
to the volume of the product, not the value (these are known as specific, not ad valorem,
taxes). This means when prices rise, revenues from the taxes do not respond; they rise only if
there is an increase in the volume of the goods sold. The volume of tobacco sales and hence
the revenue have been trending down. Volumes and revenues from gasoline and diesel have
been growing very slowly.
Future revenue effects of taxing values rather than volumes are difficult to estimate because
they depend on changes in the specific commodity prices. We can be reasonably certain the
pace of overall consumer price index (CPI) inflation will be around the Bank of Canada’s
two per cent target. But prices for individual components may deviate substantially; they could
even decline.
Rather than attempt an inevitably imprecise forecast, we will illustrate the sensitivity of
revenues to values rather than volumes by calculating the impact on historical revenues had
the taxes been ad valorem rather than specific. Had gasoline and diesel taxes been converted
to ad valorem in 2000, revenues in 2010 would have been $1.9 billion higher than actually
recorded. The cumulative incremental gain in revenues over the period — and hence,
everything else being equal, the decline in public debt at the end of 2010 — would have been
$10.2 billion. Had the tobacco tax been converted to ad valorem in 2006, revenues would have
been $0.4 billion higher than recorded, with a cumulative gain over the period of $1.1 billion.
There would have been little change in net beer and wine revenues. To the extent the higher
taxes induced lower consumption, the revenue impacts would be somewhat lower than
shown above.
There are several ways to capture the revenue impacts of changes in value: the specific taxes
could be converted to ad valorem form; the specific tax rates could be indexed; or the specific
tax rates could be adjusted periodically.
The education property tax is effectively a specific tax as well. By offsetting any increases in
assessed property value, revenue only reflects changes in volumes. Having taxes be in step
with the value of the property would provide increased revenues for the province.
Recommendation 18-29: Replace taxes tied to a good’s volume with taxes tied to the good’s
value (i.e., replace specific taxes with ad valorem taxes or otherwise capture changes in
values).
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