Legislative Assembly of Ontario

UNDERGROUND ECONOMY

BOARD OF TRADE OF METROPOLITAN TORONTO

CARPENTERS BARGAINING CONFERENCE
ONTARIO ACOUSTICAL AND DRYWALL DISTRICT COUNCIL

ONTARIO CONVENIENCE STORES ASSOCIATION

CONTENTS

Thursday 2 December 1993

Underground economy

Board of Trade of Metropolitan Toronto

John Clinkard, member, economic policy committee

John Bech-Hansen, staff economist

Carpenters Bargaining Conference; Ontario Acoustical and Drywall District Council

Cynthia Watson, conference legal counsel

Rick LeCompte, conference secretary-treasurer

Murray MacLeay, chairman, Carpenters Employers Bargaining Agency

Jim Thomson, secretary, Carpenters Employers Bargaining Agency

Ontario Convenience Stores Association

Russ Egerdie, executive director

Dr Geoffrey Pottow, board member

STANDING COMMITTEE ON FINANCE AND ECONOMIC AFFAIRS

*Chair / Président: Johnson, Paul R. (Prince Edward-Lennox-South Hastings/

Prince Edward-Lennox-Hastings-Sud ND)

*Acting Chair / Présidente suppléante: Haslam, Karen (Perth ND)

*Vice-Chair / Vice-Président: Wiseman, Jim (Durham West/-Ouest ND)

Caplan, Elinor (Oriole L)

*Carr, Gary (Oakville South/-Sud PC)

*Cousens, W. Donald (Markham PC)

*Jamison, Norm (Norfolk ND)

*Kwinter, Monte (Wilson Heights L)

Lessard, Wayne (Windsor-Walkerville ND)

Mathyssen, Irene (Middlesex ND)

*Phillips, Gerry (Scarborough-Agincourt L)

Sutherland, Kimble (Oxford ND)

*In attendance / présents

Substitutions present/ Membres remplaçants présents:

Perruzza, Anthony (Downsview ND) for Mr Sutherland

White, Drummond (Durham Centre ND) for Mr Lessard

Also taking part / Autres participants et participantes:

Stockwell, Chris (Etobicoke West/-Ouest PC)

Clerk / Greffière: Mellor, Lynn

Staff / Personnel: Campbell, Elaine, research officer, Legislative Research Service

The committee met at 1010 in committee room 1.

UNDERGROUND ECONOMY

The Chair (Mr Paul R. Johnson): The standing committee on finance and economic affairs will come to order. This is our final day in deliberations with regard to the underground economy.

BOARD OF TRADE OF METROPOLITAN TORONTO

The Chair: Our first presenter this morning is the Board of Trade of Metropolitan Toronto. Mr John Clinkard and then Mr John Bech-Hansen, would you please come forward and make yourselves comfortable.

I would just like to inform the committee that as the Chair I'm going to have to leave for private members' public business just shortly before 11. That doesn't mean that the committee won't continue. Someone will take my place for the remainder. I just don't want anyone to be disappointed that I'm not here.

When you are ready, please proceed with your presentation.

Mr John Clinkard: Thank you very much, Mr Chairman. The board of trade appreciates very much the opportunity to address you directly on this very important matter.

As you may be aware, Liberal Party member Gerry Phillips provided the initial impetus for this committee's examination of the underground economy. He indicated that the solution does not lie in increased policing, audit or collection measures, and we definitely agree with that. The approaches to revenue maximization would only be treating the symptoms of the disease and not its root causes. Consequently, our presentation today will talk about some of those causes and hopefully present some proposals for reducing it.

The Chair: If I could just stop you for just a moment, I could ask you to identify yourselves for the purposes of the committee members and Hansard.

Mr Clinkard: My name is John Clinkard. I'm a senior economist with a major Canadian bank and I'm on the economic policy committee of the board.

Mr John Bech-Hansen: I'm John Bech-Hansen, a staff member with the board of trade.

Mr Clinkard: The board of trade believes that a high and increasing tax burden is by far the largest catalyst to the growth of the underground economy. None of the other industrialized countries -- that is to say, other than Canada -- has endured a faster increase in the overall tax burden, measured as a percentage of GDP, than we have here in Canada since 1980. This trend accelerated significantly after the mid-1980s when provincial governments, most notably Ontario, initiated a less restrictive fiscal policy and actually a very expansive fiscal policy -- you could describe it as "tax and spend" perhaps -- and this continued under the current government.

According to a recent study by economist Patrick Grady published in the Canadian Business Economics publication, tax increases introduced since 1990 have added almost $3 billion, or $633 per family, to the average annual tax burden of Ontarians. Two thirds of this increase was in personal income tax, which will be specifically analysed later for its role in spurring the underground economy.

Ontario is in the unprecedented situation of having about one sixth of all the unemployed persons in the province being supported by unemployment insurance or social assistance. These support systems, while they are at first glance helpful, don't provide any incentive to those who are trying to move back into the income-earning activities. Rather, under most circumstances, recipients of unemployment insurance and welfare lose their entitlements, dollar for dollar, if they report supplementary earned income. Consequently, there's a strong incentive here to engage in non-reported cash transactions for income-earning activities. It's not surprising if recipients of state support will seek to supplement their income in the informal economy since it provides more disposable income than the conventional economy.

Committee members need to consider what can be done to limit the incentives to engage in underground activity. I think we should turn that around: It's to encourage the incentive to work -- what we're saying is the incentive to underreport -- so that there's a more positive signal given to people in receipt of these payments to enter the labour force and report earnings.

In an ideal world, lower government spending and lower taxes would be the option which all governments would pursue as the first line of defence against the growth of the underground economy. Actually reducing taxes of all kinds, at all levels of government, would leave more money in consumers' pockets and stimulate strong economic recovery, increase business confidence and spur job creation. But given current high levels of public debt, governments everywhere have limited options for reducing taxes, certainly none for increasing them. Therefore, the only viable alternative for governments today is to cut spending. Doing so, moreover, could help restore the credibility of government with positive consequences for curtailing the growth of the underground economy.

A less effective but none the less potentially helpful policy approach would be to change the mix of taxes, placing greater dependence on those taxes which are less prone to avoidance or evasion. Unfortunately, in the Ontario context it's hard to identify this strategy easily.

Contrary to every other industrialized country, top marginal income tax rates in Canada have increased markedly in recent years. The original purpose of the 1987 federal tax reform was to reduce top marginal rates, and that was done. However, subsequent income tax increases at the provincial level have caused marginal rates to move up sharply. For example, in Ontario the basic income tax rate has increased from 53% of the federal rate to 58% and surtaxes on personal income have substantially increased, raising top marginal rates to over 52%.

These increases have increased the propensity for all employed persons without source-deducted taxes to underreport income or to conduct business in cash. For some high-earning self-employed individuals, underreporting cash transactions can effectively double net income at today's high marginal tax rates. There's a far greater incentive to underground activity than is presented by the 7% goods and services tax. In some sense, you've got two things happening here. You've got the high marginal tax rates that hit high income or at least provide an incentive to underreporting among high-income individuals, whereas if we look at the GST it gives the same incentive or has a greater incentive for people at the lower end of the income spectrum.

With an increasing share of employment in Ontario being comprised of small businesses, self-employed individuals and other working people who do not have their income taxes and other charges deducted at source by their employers, increasing dependence on the personal income tax would not seem to be advisable.

Over the last two years, virtually all of the employment growth in Ontario has been among companies employing 50 or less. These companies do not tend to have the, shall we say, sophisticated tax collection and accounting procedures that many larger firms have. A small business that's starting up obviously in its first year is just focusing on hand-to-mouth operation, that is to say, answering the phone, and filling out tax forms, given the complexity of the current system, is just not one of its priorities. This is not to say that they're trying to avoid; it's basically saying that they don't have the resources to undertake this activity. Maybe they report some of the income that they get in taxes, but they don't have time and there certainly is not the incentive there to do a thorough job as happens among larger companies.

Increased dependence on taxes such as the retail sales tax and the GST as well as so-called sin taxes on tobacco are obvious non-starters for trying to increase revenues since this is one of the reasons we're seeing this explosion in the underground economy.

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The GST was originally commended as a tax which would be self-collecting, since input credits could be claimed at each value-adding stage of production for taxes paid at an earlier stage of production. The fact that end retailers of goods had to pay GST on all purchases presumably would compel them to charge it on final sales, and generally it does. The flaw in the design of the tax was its inability to provide incentives to providers of services with low material input costs to charge GST to consumers, since their GST credits tend to be insignificant. This has given rise to a large number of cash transactions in the home renovation and other service-oriented businesses.

Also, provincial non-cooperation with the federal government on the implementation of the harmonized value added tax system in the late 1980s has cost businesses dearly in terms of the administrative burden associated with calculating, collecting and remitting GST and provincial sales taxes. Consequently, dependence on these taxes should not be increased and means should be sought to reduce compliance costs.

Personal income tax and retail sales tax collectively account for about 70% of total tax revenues. The third-largest source, corporate income tax, is currently at levels that are not dramatically out of line with the other major competing jurisdictions, and we don't think they should be changed. Moreover, it's only a modest source of tax revenue for the province, accounting for only 10% of the total. Even if corporate income tax were increased by, say, 10%, it was assumed that it would not affect corporate behaviour, since total Ontario revenues would increase by less than 1%. Their visibility, again, and given the high existing tax base in the greater Toronto area and in the province as a whole, could only act as a further disincentive to locate within this jurisdiction.

Earlier, we stated our support for the view that the solution to the underground economy does not lie in increased policing, audit or collection measures. However, a strong case can be made for governments to publicize, in the strongest possible terms, the outright criminality of tax evasion and the economic harm which results from it.

We envisage something of a much broader scope and higher media profile than the Ministry of Finance's current policy of simply issuing press releases in instances of convictions for tax evasion of over $10,000. Additional deterrents to tax evasion could also be realized without additional bureaucracy simply by increasing penalties assessed in conviction for tax evasion.

Based on the foregoing, we recommend the following to all levels of government, and particularly the province:

(1) Examine the potential implications of high levels in unemployment insurance and social assistance dependency and the treatment of earned income while in receipt of these entitlements for the growth of the underground economy. Determine ways of redesigning these programs or their interaction with the income tax system so as to minimize underreporting of earned income. It may also be advisable to examine ways of enhancing recipient participation in job training, work experience or job search activities, which will increase re-employability in the formal economy while simultaneously minimizing opportunities for supplementary income earning in the informal one.

(2) Prepare public announcements which proclaim the criminality of tax evasion in the strongest possible terms. Emphasize the economic harm which results from underground activity and warn as to the penalties which will be assessed in the event of successful conviction. These should be designed for consumption by a broad audience. Penalties assessed in the event of successful conviction for tax evasion should be increased.

(3) Although it's not an option to which we are strongly disposed, increased dependence on user fees, deductibles or premiums would simultaneously reduce pressure on the evasion-prone income tax as the main source of funding for public services and would link the cost of public services more directly to users and virtually guarantee the government the needed revenues. Three examples, for example, are increased student tuition fees, toll roads and annual health care premiums or deductibles paid directly by individuals which might increase revenues.

(4) Reduce personal income taxes to the extent that increasing dependency on the other forms of revenue outlined above would be made possible. Income tax increases have had by far the biggest impact on the average taxpayer of any recent revenue measure undertaken by the government, and it's probably the single largest contributor to underground activity.

(5) The final recommendation, which we feel is probably one of the most important: Harmonize the Ontario retail sales tax with the goods and services tax. As I said earlier, the simplification of the tax system, to make it clear and easy to administer, I think is one of the major impediments to underreporting of this source of revenue. Thank you very much.

The Chair: Thank you very much for your presentation this morning. We have about eight minutes per caucus and we'll start with Mr Phillips.

Mr Gerry Phillips (Scarborough-Agincourt): I appreciate the thoughtful presentation. I particularly appreciate that you've given us some recommendations on things that we should be doing. I think defining the problem is in some respects the easiest part of this.

Let's start on your first one, looking at ways to deal with people who may be on unemployment insurance and social assistance. The Economic Outlook that came out on Monday you've probably had a chance to read, but it is interesting in that I think in 1993 there are about a million people who are either on UI or social assistance. At the height of the recession in 1982-83, the highest it ever got was about 530,000, so it's almost double, even as we are "coming out of" the recession. In fact, a number we all are aware of is that the social assistance case load never dropped in any year, even in the boom times. So it is no doubt a significant problem.

I wonder if there's another way we should be looking at the solution. You say minimizing opportunities for supplementary income. Should we be looking at something a little different; that is, minimizing the penalty for earning supplementary income? I think there's another solution to this, which would be to not penalize people who looked to supplement, and if I took that literally, it may head us in the wrong direction of a solution.

Mr Clinkard: I think the point I was trying to make, or perhaps alluded to briefly, was that if we could make the system -- again, right now you have a disincentive to reporting.

Mr Phillips: Yes.

Mr Clinkard: If you could provide a preferential tax rate or a -- I think that's what we're talking about, a preferential tax rate, so that those first dollars of extra income aren't immediately hit. If you look at the fact that these are just dollars, if some of those dollars are training dollars so that there's an incentive to change activity towards self-enrichment, I think this is another direction.

Mr Phillips: Okay, because I'm not sure how big this is in the underground economy, but I think that I'd lean more towards that solution.

Your observation is that in your opinion the biggest loss of revenue in the underground economy is personal income tax. I think we hear a lot about cigarettes and alcohol. I agree with you, personally. I look at the revenue from personal income tax. As you point out, personal income tax has gone up $2 billion in the last three years; in theory, that's the rate that it's gone up. Revenue from personal income tax has dropped by $1.5 billion. Something beyond just the economy is going on here. Personal income tax has gone up $2 billion; revenue has dropped $1.5 billion. There is, in theory, an unaccounted-for $3.5 billion that goes beyond just the economy. Is that the order of magnitude we're talking, what we would have normally expected from personal income tax and what actually has come in?

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Mr Clinkard: First, my sense is that smoking, while it's an important source of revenue, first of all, is declining in absolute terms, and yes, we are pushing some off. But that's not the big deal. Even the issue of underreporting of earnings: We talk about cash sales from residential construction. I don't really consider that all that significant, because if you look at residential construction as a percentage of the total economy, it's about 5%. If you look at renovation as a percentage of that, it's about 1%. We're not talking a large component of the overall economy. So I am agreeing with you that it's the income tax that's the big problem.

Mr Bech-Hansen: I wonder if I might just have a chance to supplement that a little bit, because I think some of your initial concern with looking at the issue of the underground economy was the fact that personal income tax revenues weren't keeping up, for whatever reason. We were talking about this at our committee the other day, and there are at least a couple of other reasons why personal income tax revenue has not been keeping pace which you might not attribute at all to the underground economy.

I think there's a bit of delicious irony in one of them, in a sense, and that is that we have a rather progressive tax system in Ontario. It's gotten more progressive in recent years as surtaxes have been added on. But that's kind of a two-edged sword. While that does increase revenue as people's incomes are increasing, as we know, we have a large number of people who have lost their jobs. I think I've seen some research, in the States at least, which indicates that for the average person who loses a job and then finds another one, they're losing about 25% of their income. That has substantial tax bracket implications here in Ontario. It doesn't just reduce tax income by the amount the person lost income; it drops it by considerably more because of the progressivity of the tax system. It's going to drop somebody into a lower tax bracket.

As a matter of fact, there's an interesting report you might want to look up in the June 1993 OECD Economic Outlook. It's an article called "Automatic Stabilizers." It makes this point quite strongly about Canada, because we are ranked as having one of the most progressive tax systems in the world at the moment. The effect that has during a recession is amplified in terms of what it does to your personal income tax revenue.

Mr Phillips: My sense is that there's a growing number of people who realize that perhaps the best investment of their time and effort is in finding ways to minimize taxes. They realize that if they can find a way to reduce their taxes by $5,000, they've just got a $10,000 increase in pay. There actually is a fine line between the informal economy and the underground economy. My own judgement is that an awful lot of people now obviously are working on their own, working out of their home, writing off the expenses of that. They've invested a lot of their energies into -- charitably, it's in minimizing.

Mr Clinkard: Do-it-yourself; it's doing it yourself in a very broad context, I think. We're not just talking about home renovations, but about a whole mix of activities. I would agree, yes.

Mr Bech-Hansen: If I could just make one other observation about the income tax and why the revenue from that might be going down a bit over time, there might be a little bit of a demographic factor as well, I think. There have been some studies I've seen indicating that as we are all aging, the tendency is that we derive more and more income from other sources than employment: a fair bit coming from investment, interest dividends, that sort of thing. That has fairly considerable tax implications. I was just looking at a table of top marginal rates. For employment income, as we know, the top marginal rate in Ontario is about 52.4%; on interest it's the same. But on dividend income, it's 35.4%, on capital gains, 39.3%, and you have more and more people who are deriving a share of their income from accumulated wealth, as it were, and fewer people from employment income. That is primarily a demographic consideration.

I have one observation on that point. The total income from interest, dividends and other investment income has doubled, to 15% of all personal income in Canada from 7% in 1991. That's just something I saw in the Financial Post a short while ago.

Mr Gary Carr (Oakville South): Thank you very much for the presentations. I appreciate the recommendations you came out with and laid out very nicely here.

In 2 you talk about preparing public announcements emphasizing the economic harm and so on. One of the problems we've got with the underground economy, and some of the people who've come here have said that, is that they don't believe any government, of any political stripe, whether it be federal, provincial or municipal, is spending our tax dollars wisely, and that's one of the reasons they're angry.

Mr Anthony Perruzza (Downsview): Except the future Tory government.

Mr Carr: No. I said at even at the federal level, the Conservatives. They're displeased with them; they didn't think they did. They don't think this NDP government does, or the previous Liberal government. They're mad at all political parties and governments and they think they're all wasting money, and also at the municipal level, school boards and everything else.

So having a public announcement saying you have to pay your tax dollars to be a good citizen, in my mind, whatever amount you spent would be a total and absolute waste. Why did you call for it in your recommendation? I think it would absolutely be useless to tell the public, "You should pay your taxes." I think most people are angry with governments and don't want to pay them because they think they're wasting their money, and in a lot of cases they're right.

Mr Clinkard: You have to link the value you're getting with the price you're paying; to your point, it's to make the benefits of the government programs more evident. The issue, though, is that in those cases where it is, where we do understand that if you want to have a good road system or you want to have the security we need, these taxes are necessary to pay for these programs.

I don't think you can undertake a blanket whitewash of all government programs and say they're of no value, but I think an examination of those that do and linking those to the revenues people are paying for is worthwhile.

Mr Carr: Talking about linkage, I think your third point is good, putting in user fees. The problem with governments -- and again I say this not to be partisan towards this government, because all governments do it. Your third and fourth point talk about reducing income tax. The problem is that this government, like a lot of governments, is increasing user fees without decreasing any other taxes; all they're doing is trying to grab more revenues.

I think most people would like to have more of a user-pay system, but they don't see any decrease in their income tax or corporate tax or whatever. It's just increased revenue above and beyond everything else. It gets to the whole issue of what I believe is the problem: We do not have a revenue problem in the province of Ontario; we have a spending problem. That's a fundamental difference with the government. But you're calling for more user fees. I take it, though, that you wouldn't want more user fees unless your fourth point comes in. They have to be linked together and there have to be reductions in income tax; otherwise you would be opposed to any new user fees on anything in the province.

Mr Clinkard: You're absolutely correct.

Mr Carr: Finally, the fifth point I think may come about as a result of the new federal government talking about what to do with the GST and the PST and so on. In our small business committee that went around, we heard a lot about this problem and that they want something done. Because of politics, I don't know how fast we're going to move, because we're probably going to have a year now of studying it again.

One of the things that has come up is how they'd like to see taxes. Business is very concerned that the government will try to hide tax. The GST was very clearly out there and they think that if it does get buried, then ultimately the companies, whatever store, are going to be blamed for the increase. Would you like to see, whatever happens, the taxes broken down, or would you rather see them hidden and buried in the price of the goods?

Mr Clinkard: As an economist, I would prefer to have the price up front, because this is a price of government and it's visible. I think that was one of the reasons it was put in as a visible tax.

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Mr Carr: Yes, originally.

Mr Clinkard: As a consumer, I'm not sure, but my background suggests that we like to see on that shelf the good marked at its price, and we like to see the unit price. The consumer wants this information, and consistent with that, I think the spelling out of the tax is important and should be there too.

Mr Carr: In terms of the harmonization, which everybody has called for, how would you propose we do it? How simply should it be done?

Mr Clinkard: The simple way? Obviously, to minimize resources in terms of a consolidation of the collection services and that the same sources be used to collect. We've seen employment in the collection of the GST increase dramatically, and that's really a non-productive use of resource. Here is a lot of people who are really adding a marginal contribution.

Mr Carr: Who should collect it, the federal or the provincial government?

Mr Clinkard: I think federal, to have consistent collection across the country. That makes more sense.

Mr Carr: Knowing governments and how their bureaucracies are built, do you really think if we actually did that we would see a reduction in any of the provincial people involved in the income tax, or do you think we'd just see the same total numbers even though it's harmonized?

Mr Clinkard: I think you would see slower growth, obviously, reductions through attrition. I'll be happy with that. If I get more, yes, but give me that to start with.

Mr Bech-Hansen: I would just say that somewhere in the past I presume there was an Ontario bureaucracy when we did have a separate income tax, but now we piggyback on the federal one and it remits the funds back to us. I think the sales tax is going to work the same way.

Mr Clinkard: When we talk about interprovincial trade and the facilitation of companies doing business across Canada, to have a consistent system would facilitate that, because as soon as you get individual provincial jurisdictions, you have another set of paper. It just doesn't make sense.

Mr Perruzza: Just a couple of really quick questions. Income taxes and people trying to avoid paying income taxes: When I think about it in my own mind, I ask myself, can a politician evade or avoid paying income taxes? No, it just comes off our pay. Can a school teacher do that? No. Can a person who's working for somebody and has got a regular wage? No, because it just comes out of their pay. Could a reporter from the Toronto Star or the Toronto Sun whose only source of income is that job skirt paying income taxes? The answer is no again. When you get right down to the bottom of it, who can conceivably avoid paying income taxes? What type of person?

Mr Bech-Hansen: Just a quick observation: How many jobs have you lost in Ontario over the past three years? A great number of those people could be in the position to work on their own and may be doing so, and they're in a position where they can avoid paying it.

Mr Perruzza: So people who are working on their own, who are self-employed, can avoid paying income taxes. That's what it comes down to, right?

Mr Bech-Hansen: Yes, because they're not being deducted at source.

Mr Perruzza: I just want to follow this line of thinking, because I fundamentally disagree with you and I fundamentally disagree with Mr Phillips that that's where the abuse and the evasion is taking place, at the income tax juncture. It's a self-employed person. Would you agree that profits have come down considerably for people and business has diminished considerably for people who are self-employed?

Mr Clinkard: I don't think anybody would disagree that there's a cyclical component to the current situation, ie, when the economy turned down, your revenues dropped, and you saw averaging down in tax revenues. There's no question about that. But as I pointed out earlier, with virtually all the employment in the last two years -- the net employment, that is, we're talking -- in companies employing 50 people or less, and probably it's even further down, it's probably around 10 or less, the complexity of the current system, the lack of incentive to report, if you can put it off or if there's -- you don't have the rules in place, you don't have that automatic deduction, and it's: "Wait a minute, we've got to get customer X satisfied. Let's solve his problem. The government can wait. They're still there." So you're pushing this problem ahead. As the cycle picks up, as maybe you grow, you will gain some of this back perhaps, but it will be slow.

Mr Perruzza: What you're saying is that a self-employed individual can be creative in the way they report their income and the way they extract their income from their business? If you've done any bookkeeping or accounting for small outfits, I think what's readily transparent is that there is a number of rules in place where they can be very flexible in terms of the income they extract. The income they extract generally diminishes as their business activity diminishes, and in order to become competitive and compete with other outfits, you try to cut out the middleman, and that's the taxman.

But I don't believe that happens at the income tax juncture. I think that happens at junctures where they can't be creative with how much income they extract from their business, and that's when they have to go out and pay for things like the GST and sales tax. I believe the fixed taxes that people can't skate around is where the incentive for evasion happens.

I just wanted to get those comments in, and I want to leave a couple of minutes for my colleagues. But I think that's an absolute fallacy, because when you look at the Ontario workplace and Ontario as a whole, there are very few people who can actually cut out the government at the income tax juncture, and that's people who are self-employed, and they can be very creative under our current system with the way they manage their affairs in terms of their accounting, their income, their loans, carrying their losses forward and backward. I just wanted to get that on the record.

The Chair: Mr Wiseman, you've got about two minutes.

Mr Jim Wiseman (Durham West): I remember reading an article in 1988 that described how it is that some of the biggest corporations in this country use legal ways of not complying with the taxes. What they do is they basically underestimate what their gross earnings are for the year, underestimate by a considerable amount, and send in the taxes on that. And then they get all the lawyers they've got around, when the auditing from the government comes back and says, "You didn't pay enough," and they say, "Oh, yes, we paid enough." They send their lawyers in for two or three years to challenge these, and that's worth their while. That's part of the underground economy we haven't even talked about yet, this kind of tactic at the highest level.

Mr Clinkard: I guess I'm not sure where this income is being hidden, because certainly --

Mr Wiseman: It's not being hidden. They're doing it deliberately. Everything's legal.

Mr Clinkard: When you say it's legal, then I guess I have to say, what is underground? What is aboveground and what is --

Mr Wiseman: Well, it's a form of tax diversion. If you're talking about a moral question here, isn't it immoral for large corporations to do that kind of thing? Isn't it immoral for financial consultants out there in the public to be telling people to put more in their RRSPs because they know they'll be able to hide the interest from it? There are a whole host of things that are going on.

Mr Clinkard: Well, what do you do? I don't mean to be too personal here, but when you say immoral, immoral for whom? Immoral for the person who's trying to guarantee themselves an income in their retirement?

Mr Wiseman: No, when they deliberately overinvest in their RRSP, knowing that the federal government will tell them to take it out without penalty, but they leave it in there so they can hide the interest in an RRSP so it's interest-free.

Mr Clinkard: They might offset that if they have overpaid the government and if they were hoping to get a reasonable investment on the tax revenues they received. Isn't that immoral?

Mr Wiseman: Well, exactly.

Mr Clinkard: No, I mean, isn't that immoral on behalf of the government?

Mr Wiseman: It's the loopholes that have been put there.

Mr Clinkard: Well, I guess loopholes, and we're saying -- the morality of this thing I don't think is an issue here.

Mr Wiseman: Sure it's an issue. It's the whole basis of one of the parts of your argument in terms of trying to get people to understand that what they're doing is wrong.

The Chair: I'm afraid our time has expired.

Mr Wiseman: Thanks.

The Chair: You're very welcome. I'd like to thank Mr Clinkard and Mr Bech-Hansen for making their presentation before the committee this morning.

Mr Phillips: On a point of order, Mr Chair: Just on the income tax, it was the Ministry of Finance officials who said they thought the biggest revenue loss was in personal income tax, so if Mr Perruzza's got a problem, he probably should talk to them, because maybe they're wrong.

The Chair: Thank you, Mr Phillips.

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CARPENTERS BARGAINING CONFERENCE
ONTARIO ACOUSTICAL AND DRYWALL DISTRICT COUNCIL

The Chair: The next presenters we have this morning represent the Carpenters Bargaining Conference and the Ontario Acoustical and Drywall District Council. If representatives from these organizations would please come forward and make themselves comfortable, I'm going to turn the chair over now to Ms Haslam.

The Acting Chair (Ms Karen Haslam): They're both waiting for one member. Actually, the Carpenters have so many people on their list, if they're only waiting for one member, can't they start without one member? We are looking for the Carpenters Bargaining Conference and the Ontario Acoustical and Drywall District Council. Please take your seats, then. There are four seats there.

Good morning. Thank you for waiting. We're only a few minutes late, not too bad, but we do appreciate you waiting and making your appearance here today.

We'd like you to start by identifying each one of you who is sitting there, and when you are answering a question and a new person is answering the question, would you again repeat your name for Hansard so they can be sure who's talking and who's answering the questions.

Ms Cynthia Watson: Would you like everybody to introduce themselves?

The Acting Chair: Whatever you want.

Mr Rick LeCompte: My name is Rick LeCompte. I'm the secretary-treasurer of the Carpenters Bargaining Conference, Ontario provincial council.

Ms Watson: I'm Cynthia Watson. I'm legal counsel for the Carpenters Bargaining Conference.

Mr Murray MacLeay: I'm Murray MacLeay. I'm the chairman of the employers' side of the Carpenters Employers Bargaining Agency.

Mr Jim Thomson: I'm Jim Thomson, secretary for the Ontario General Contractors' Association.

Ms Watson: We also have with us Mr Don Guilbeaut, who is the chairman of the CBC; Mr Bob McKean, who's the manager of ISCA -- that's Interior Systems Contractors Associations; Mr Joe Lieberman, who's legal counsel for the AAO, the Acoustical Association of Ontario; and also Mr Jim Smith, who's a board member of the ninth district for the United Brotherhood of Carpenters and Joiners of America.

I'd like to thank you for taking the additional time to hear our representations. Basically, we understand you're looking into the crisis with respect to the black market. We're going to focus specifically on the impact of the crisis of the black market on the construction industry.

I think it's pretty telling that we have a group here comprised of both contractor -- employers -- and the trade union. It's not very often that happens and I think that's indicative of the state of the crisis frankly, of the impact of the black market on the construction industry.

We're looking at a problem where unemployment in the construction industry, and for the carpenters in particular, is 50% province-wide and up to 70% in certain regions, particularly northern Ontario. That leads to a lot of resulting problems, including deunionization etc, and it becomes a bit of a vicious circle because the black market, to a certain extent, perpetuates and magnifies the unemployment crisis, while at the same time the unemployment then causes the need, obviously, for the black market.

From our perspective, the problems of the black market then lead to a number of issues, which again sort of grow exponentially in terms of magnifying the problem, not the least of which, and certainly from your perspective, would be the lost revenue to the government -- I'll deal with that more in a moment; it's certainly outlined in the brief -- and the resulting impact on social programs.

More importantly from our perspective, we're faced with a problem where what I'll call legitimate contractors, and certainly trade union contractors, are on absolutely an uneven playing field, as against their competitors who are operating in a black market context. That's for a number of reasons and, again, I'll go into a little more detail about that in a moment. I think it necessarily affects the quality of work, which has implications for the consumer, for the integrity of the industry as a whole and certainly for the government, one would hope, as well. Going in hand, obviously, with quality of work and of equal concern, I would hope, are the consequent safety issues that go with that.

Another problem that I think gets overlooked is the apprenticeship program. That is a very serious problem in terms of the future of the industry, because the integrity of the industry -- you get your talent and you get the growth of the industry from the apprenticeship program. The apprenticeship program at the moment is in a very serious crisis as a result of lack of funding, lack of ability to attract youth, frankly, to the apprenticeship program, because there seems to be very little advantage to be gained in light of the black market where the bulk of the work is going at the moment.

The apprenticeship program also kicks in to the extent of the uneven playing field I was talking about, because you have union contractors and the trade unions trying to be responsible to what I'll call the integrity of the industry. To that end, they bear certain responsibilities and assume certain costs, both in terms of finances and investment of time and energy that is not borne by the non-union sector and specifically by the black market sector.

As a result of that, you have a situation where these groups are trying to have some responsibility for the future of the industry. It's that very effort that puts them at an absolute competitive disadvantage as against their black market counterparts; for example, contributions to the secretariat, which are mandated by legislation, frankly, and imposed only on the union sector within the industry. You have the apprenticeship program where, again, the costs are borne by the union contractors and the union equally. You have involvement in a number of occupational health and safety forums, some of which are mandated by legislation, some of which the parties have voluntarily entered into pursuant to their collective agreements. You have pensions and benefits.

They are looking towards the betterment and future of their membership to ensure there's not unnecessary strain put on the social programs. They make sure their members are protected, so there's not an unnecessary strain on pensions and security and social programs later on. It's that very kind of involvement and responsibility that puts them in a position where they're absolutely uncompetitive in the current market.

We have a number of solutions to propose to you, one of which is what we'll call a mandatory registration or a licensing, and that is something that will have to be worked out. There are certainly some differences of opinion to the extent of how far that should go. But certainly that kind of certification system would ensure minimum levels of expertise in a number of areas, which would necessarily lead to increased quality of work and increased safety and would go a very long way to levelling out the playing field, which is one of the fundamental problems we're facing at the moment.

It would also deal with some of the financial stability problems which are currently facing the industry in so far as you have black market employers or contractors or organizations out there that don't have financial stability, which again puts further strain, because somebody at the end of the line in a number of cases ends up getting burned and there's no enforcement mechanism to be able to get those funds back. Unless you ensure some kind of mechanism at the front end to ensure the viability of a contractor in the construction industry, you're going to be left with a problem at the end of the day, which puts an additional consequent problem on our social programs.

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An additional solution proposed, certainly from the union contractors' and the unions' perspective, is that to the extent that the government is one of the single largest purchasers in the construction industry, we feel the government has some responsibility and certainly the ability to make some fundamental impact on sending a message out with respect to the black market. One of the solutions we see is that with respect to government-funded projects, those projects should go by way of union tender. Again, there's some disagreement. Certainly the non-union sector isn't in support of that proposition, but I think that is the only solution that addresses all of the outstanding issues I've talked about.

Obviously I'm not going to take you through the brief in detail, because you have a copy of the brief. I'll leave that with you. But if I can take you through, we start by dealing with the crisis in the industry, and I think I've outlined some of the issues that we're talking about, one of which is unemployment.

Specifically what you're looking at, with respect to the carpenters, is that the number of man-hours worked has decreased by 55% in the last three years. That is an absolutely significant decrease in terms of the unemployment issue. As I've indicated, in northern Ontario we're looking at up to 70% unemployment of the carpenters. When I say "carpenters," I'm looking at the whole; it's the carpenters, acoustic and drywall and resilient flooring. This results obviously in a severe competitive disadvantage. Part of the level playing field problem comes from, as I'm sure you've heard a million times, black market contractors who are not making necessary contributions to unemployment insurance, workers' compensation, apprenticeship program, Canada pension, employer health tax, and that even whittles it way down; there's no pension and benefits provided and no provincial sales tax. When you look at the whole picture, it creates an absolute imbalance and an impossible imbalance to overcome for what I'll call the legitimate contractors and the union members as against our black market competitors.

As I've indicated, I think that necessarily affects the quality of our buildings. Not to be trite, that has to be looked at. The buildings are a sign of our future. It's social property and I think it's something the government has a responsibility to protect in terms of the future of our youth.

Also particularly of concern to the union and union contractors is that when you allow the black market to escalate in the way that it has, it necessarily has an adverse impact on collective bargaining on a number of fronts, not the least of which is that, as I've indicated, the union contractors become unable to compete, which necessarily means that their collective agreements become useless to a certain extent because you can't get the work and you have the vast majority of your workforce who are unemployed.

Additionally, it becomes impossible to organize. There are no advantages to an employee out there to go to a union where 70% of his workforce is going to face unemployment when he can go down the street and get $10 or $15 an hour under the table, not have to pay income tax, which again, as I say about the circle, ties back in. That's loss of revenue to the government, and a consequent increase on your social programs, because those workers traditionally are not covered because workers' compensation benefits haven't been paid, no contributions made in terms of the social programs. When the chips fall down, they're the first people to be using the social programs. In fact, I think you'll find a significant number of people who are engaged in the black market industry and accepting what we call cash on the dash are also at the same time collecting either unemployment insurance or welfare benefits. They're doubly abusing the system.

We talked about the solutions. How do you stop the black market? I think obviously the key has to be that the government has to take steps to make the black market uneconomical, because currently there is every advantage in the world being offered to contractors who engage in the black market. The government has to take some sort of positive steps to ensure that this is not the case and that at a minimum, as I've said, everybody is put back on, at the very least, a level playing field. That would necessitate making sure that appropriate deductions are made for each of the items I've just indicated, making sure you don't have unions and union contractors being forced to make contributions to the secretariat, to their apprenticeship programs, to all of these other benefits that we've talked about, when their competitors are not in the same position.

One of the solutions, as I've indicated, that will necessarily address that is by having the work go to union contractors, because immediately you're governed by a collective bargaining relationship; unions and union contractors are governed by significant legislation that addresses a lot of the very issues that are avoided in the black market regime. Certainly, both employees and employers, when they're operating within a union context, are aware of what their obligations are.

Another alternative that has certainly been suggested is beefing up the fair wage system that's currently in place, the fair wage schedule. We've included that in the brief as being an alternative, but I can't stress enough, realistically, with all respect, I don't think the government is in a position to invest the kind of money that would be necessary to make that a workable alternative at the moment. One of the inherent problems with the fair wage scheme: The rate currently set is too low, obviously. So that, at a minimum, would be something that would have to be addressed.

But even allowing for an adjustment in the rate, the fair wage scheme does not account for pensions, does not account for benefits, does not account for participation in a number of the programs that I've talked about, including the apprenticeship program, for example.

Most importantly, even if you addressed all of those issues, as it stands currently, there is one individual in all of Ontario who is responsible for enforcing the fair wage scheme. That is a physical impossibility, and the individual himself concedes that there are virtually no steps taken to enforce the fair wage scheme. The input of money that would be required to make that a workable alternative I think would be prohibitive in today's economy. In any event, even if you were to address all those problems, the bottom line is, the fair wage scheme does not address the black market issue, which is the concern that you're facing here, with all respect.

As I've indicated, and I won't reiterate it, certainly there's a portion of the brief here as well dealing with an effective system of compulsory registration. That would be both for the employees -- in other words, the carpenters -- and also for the contractors. As I've indicated, there are a number of areas we'd deal with that you'd need to address to ensure that there's a minimum level of competence; you would need to ensure a minimum level of safety awareness and safety protection with respect to the job sites, a minimum level of financial stability etc. Those are all areas that would help to put people back on a level playing field.

More importantly, in terms of the cost factor, I think one of the problems is that when people deal with the black market and one of the solutions put forward is to get away from the black market scheme, the immediate response is that the cost is going to be prohibitive. I'd ask you to take a very close look. There's a report that's been included in appendix 1 done by the accounting firm of Dunwoody Ward Mallette. I think the results are very telling because the fact is, in terms of the cost of unionized construction labour, there's absolutely minimal cost between the bids that come in from the non-union, including the black market sector, as compared to the trade union sector and its bids.

Additionally, I think it has to be recognized that even when you're looking at the bids against each other, there's a marginal difference, as I indicate, and there are studies to support that. I'll leave you with a source book that also includes a number of more significant studies and articles on this issue.

Having said that, those figures don't account for the additional cost that, when you're looking at the black market, the government ends up losing again as a result of the lack of funding to social programs, the lack of contributions made to some of these necessary programs that we've discussed already.

Just to be clear, the Dunwoody study indicated that there was a margin in most cases of only 1.9% between the bids. In some cases there was absolutely no difference. When it was brought down in accounting terms, it was a 0% difference, in some cases 0.5%, but in very few cases more than 3%, and the average came out as a 1.9% margin between unionized contractors and the non-union. When I say "non-union," that's not necessarily even accounting for the black market, as I've indicated.

The apprenticeship program I've already discussed.

Another factor that has to be considered is productivity in the industry. I think one of the reasons -- and it can't be ignored that you have in the black market significantly lower labour costs, and in some cases as much as 40% to 55% lower wages and overall labour costs.

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Notwithstanding that kind of difference, where you're looking at a 55% difference in the labour costs, at the end of the day, there was considerably less difference in the overall cost of the construction projects between the two groups. That can only be accounted for if you consider that once you get out of the black market sector, you're looking at a drastically increased and more efficient organization, and that is by virtue of the fact that you have apprenticeship programs, you have safety training, you have skills training and you're looking at a workforce that can get in, do their job and get out in a way that is safe and economical at the end of the day.

You'll find that, again, there are articles that deal with that at page 16 of the brief, where it's looking at union wages exceeding the non-union by 54%, although construction costs were 20% lower on the union job. So I think it's a myth to assume that the black market is in fact a more economical way to proceed.

Just briefly, so that we can allow time for questions as well, to conclude, the underground economy obviously represents a very serious threat and I think the threat becomes more real because the problem escalates when you tolerate a black market industry and allow an unlevel playing field. The unionized contractors -- which is happening -- and union members are on a daily basis coming into the union offices and indicating that they're going out and joining the ranks of the black market. They're coming in and asking for their welfare papers to be signed off and they're laughing all the way to the bank, because otherwise lawful people are being forced into a situation where the only way to compete is to cheat, frankly.

You're going to end up seeing the demise of legitimate contractors. You're going to see the demise of the Carpenters' union and other construction unions, frankly. That problem is going to be unavoidable, and necessarily with that you're going to see the demise of our social programs and the demise of the integrity of the industry. I don't think that's at all overly dramatic, because with all respect, we're starting to see that happen today already.

So for that reason, I think the committee has to take a very serious look at the situation. As I'm sure you're aware, we've already met with the Minister of Labour and we've also met with Minister Brad Ward to discuss the issue. If you're interested, a much more comprehensive brief, frankly, was submitted to them, because it dealt with issues in addition to the black market. That brief would certainly be available if you're interested to look, as well as the source book, as I've indicated, a copy of which I will leave with you.

Again, just concluding to allow you the opportunity, what we're requesting that the committee look at and include in its final report are the following recommendations:

(1) Absolutely, steps have to be taken to ensure a level playing field between what we call fair employers, legitimate contractors, including the trade union, and black market employers. This can be done either through requiring publicly funded work to be done through union contractors or through a drastic reform of the current fair wage scheme, which, at the current time, is pointless.

(2) You have to ensure that the law is enforced rigorously, stiffening legislation that exempts independent contractors, because that's a huge problem, and that's where the whole myth of the black market is allowed to escalate. They set up a situation where they purport to have independent contractors but in fact they have no tools; they have no business; all they have are their hands.

The term that's now being bandied about, and you'll see it in the source book as well, is "labour broker." "Independent contractor" has a lot of connotations because of the trucking industry etc, but I think the bottom line, so long as you understand the point, is you're looking at somebody who is offering labour only. Call it a labour broker, call it an independent contractor, call it what you will, but the fact is they are employees who are working in the construction industry purporting to be something they're not, and as a result, avoiding all of the inherent obligations that are being borne by the unionized contractors and the trade union itself and its members.

Additionally, we'd be asking you to recommend the institution of a system of compulsory registration, as I've indicated, both for the workers and for the contractors in the industry.

Unless you have any questions -- I'm sure you do -- at that point, that wraps up the synopsis of what our concerns are and the current state of the crisis in the industry.

The Acting Chair: By my calculations and because we started late, we have approximately six minutes per caucus for questions. We'll start with Mr Cousens.

Mr W. Donald Cousens (Markham): It's good to see everybody together. It's a good scene you're presenting and we appreciate it. Could you make available a copy of the report that you gave to Mr Mackenzie and Mr Ward? That would be of interest to us.

What is the ratio, even the numbers, of union to non-union members within the industry as we know it today in Ontario as it affects carpenters?

Ms Watson: In terms of the overall numbers or in terms of the numbers -- what we also have is a breakdown of the number of government-funded work that's going union as opposed to non-union, which is of some interest.

Mr Cousens: You can give me that. I don't know how many union or non-union members there are. It would be just helpful for me to know.

Mr LeCompte: In 1989 Statistics Canada said that in the province of Ontario there were 65,000 carpenters or carpenter foremen. That could be equated to non-union, union, CLAC, the Christian trades, labour and people slotting themselves, maybe in the Labourers' union calling themselves carpenters, but Statistics Canada said there were 65,000. The carpenters in the acoustical drywall field, carpentry and resilient flooring were somewhere in the vicinity of 15,000 to 17,000 members that we can say are members of the Carpenters' union in the province of Ontario.

Mr Cousens: How many are non-members?

Mr LeCompte: The difference would be of what Statistics Canada said in 1989.

Mr Cousens: What percentage of business do you see going on in the black market, of the total business being done in the province of Ontario? One of the things our committee's been looking at is just how large a market that is. The home renovation industry was targeted as one of those areas. Do you have any sense of how large that is?

Ms Watson: The problem is it's very tough to track down, obviously, because that's part of the inherent problem with black markets. They're not about to come forward and be accounted for.

Mr Cousens: I know.

Ms Watson: Just to give you some sense of the difference, certainly between union and non-union, our information is that a large percentage, certainly regionally, of what I'll call the non-union work is in fact black market work that's going on.

Across the province, overall, 50% of government-funded projects, approximately, are going non-union. But the more telling figures are that certain regions, including Sudbury and a lot of the northern Ontario and more remote areas that are most in need of assistance, have in some cases 96% and as high as 98% of the work that's going non-union, and our information is that a very large chunk of that includes black market as opposed to legitimate non-union contracts.

Mr Cousens: One final thing just quickly, I know that time is limited, in the report done by Dunwoody, it had one reference there and it was BDO Dunwoody Ward Mallette on workers' compensation and they say: "We believe it is safe to assume that the premiums have not been paid" to workers' compensation "by the drywall contractor." That is one of those elements that we haven't really touched on in the committee, but commitment and payment of WCB is an important part of providing government services in the province of Ontario. Is that a common problem?

Ms Watson: It's a huge problem. I'll make sure I do leave a copy as well of the brief that was submitted to the Minister of Labour because we have quite a large segment in that brief that deals with the problem of workers' compensation. As you are well aware, workers' compensation in Ontario is in a bit of a crisis itself at the moment, and we feel that's in large part or certainly in some measure due to the fact that it's not getting appropriate contributions from these groups.

One other thing I should clarify, since you mention the report, because the brief, when I re-read it, was a little misleading to the extent that it suggested the Dunwoody report dealt specifically with black market. It didn't. It dealt with non-union, and if anything, the black market would be even a further step removed. The costs that you see in the Dunwoody report, in terms of loss of revenue to the government, are even more magnified if you consider it strictly in the context of black market as opposed to non-union including black market. I just wanted to clarify that.

Mr Cousens: Okay. The WCB thing is one thing we have to really look at.

Mr Thomson: It's very hard to establish the leakage for WCB, but it is very substantial in our industry.

Mr Cousens: That's certainly something that I appreciate your raising, and more information on that would be very helpful.

Ms Watson: Finally on that as well, I think it ties in with the WCB. Statistics show, and unfortunately in Canada the Workers' Compensation Board does not break down union versus non-union, but in the United States we have studies that show that union workers are significantly less prone to industrial accidents than is the case with their non-union counterparts, and I think that's an interesting study and you may want to look at that in conjunction with the workers' compensation issue, because the two go hand in hand.

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The Acting Chair: Thank you. Right on time. I appreciate that.

Mr Norm Jamison (Norfolk): Thank you for your presentation. I'm really interested in what you had to say about the percentage or the number of people who are going underground at this point in time within the building trades, especially around renovations and situations like that. What percentage of the unemployed carpenters or drywallers or whoever would you think at this point would be participating in the underground economy?

Mr LeCompte: I can use an example in an Ottawa local, 2041, which is the drywall local. There are approximately 700 members in that local and right now there are approximately 300 who are working out of the 700. That's union now. This is a union local, but there are 150 to 200 who are on the books but we don't know where they are. In other words, these people are purporting to be unemployed. They're union-dues-paying members. They come in and pay their dues and they're covered in dirt. They say, "Well, what are you doing?" "You know, I've got to live, I've got to eat."

One of the things that is very common out there is the fact that the deals are being made on the jobs. As we pointed out, good working relationships with the contractors are being forced to make deals with the membership and having to actually breach the collective agreement in order to survive. That's the shame of it all. The good, stable contractors for years are now having to resort to an undermining of collective bargaining. As we said to the Minister of Labour, if we took the contractors to the board every day on a violation, you'd have to build a new 400 University Avenue to keep the grievances going.

Mr Jamison: That's an interesting comment. I think in practical terms, you have an idea of what's going on there and I think you've described that.

In terms of the union/non-union proposal that you've put forward, do you want to expand on that? I'm not sure exactly what you mean. I do understand that free, unfettered business is exactly that, the underground economy, but there's a great push at this time to look at the small business community, and many of your members are that, streamlining paperwork and doing all those kinds of things to help that situation out.

As we move towards that, I guess the question is, what's the union/non-union situation and how does the government fit into that as far as making the small business person more able to cope with the abundant amount of paperwork that's out there?

Ms Watson: Dealing with that for a moment, there are two comments I have to make. One, you mentioned about the crisis, particularly with respect to home renovations. There's no question that is an area of considerable crisis, but we can't stress enough that the problem goes well beyond just the home renovation issue.

Frankly, as I've indicated, the union contractors and the trade unions, on very large-scale projects, government-funded projects, the hospital and education sectors particularly, we're seeing an absolute increase and rise in the black market that's going on, and the untraceability of that kind of work. So the problem goes well beyond just home renovations at this stage. We stress very much that in terms of your recommendations, try not to just focus on that, because the problem has become much more far-reaching.

In terms of the union/non-union split -- and to be fair as well, certainly some of the contractors here represent both union and non-union, I have to be fair about that -- our suggestion has been, to the extent that the government can control its spending, ie, government-funded projects, we think a very reasonable solution is, on government-funded projects, that work go by way of union tender.

As I've indicated, in a lot of regional areas, up to 98% of the work is going non-union, and in some places there was a 0% to 0.5% margin in the difference between the two bids. It's not our intention to say everybody in the world has to go union or a situation analogous to Germany, and I'm sure the contractors would be biting my head off if I tried to do that. That proposition is geared towards government-funded projects and to the extent that the government can control it.

By the same token, I think there needs to be a greater education and getting rid of the myth that union is significantly higher cost than non-union because the facts just don't support it, as indicated in the studies.

The Acting Chair: Thank you. Mr Wiseman, you have a minute and a half.

Mr Wiseman: I'm curious about your idea of a registry and the reason for that is that I had a non-union construction company phone me really angry about the fact that they could not bid on a job at Queen's because it was union. If you've got a legitimate non-union construction company doing everything by the books and by the rules, would the registry be able to allow them, if it was constructed in some way, to also bid on government jobs in your scenario? Because I can just see the phone now and all the lights are ringing.

Mr MacLeay: You can bid on government jobs now as a non-union contractor. There's nothing that says that you can't.

Ms Watson: If they stayed under our proposal.

Mr MacLeay: Under our proposal, it wouldn't change.

Ms Watson: We've got two proposals. The registration proposal is separate and apart from -- I mean, we would like both ideally, but you can certainly separate out -- if there's concern about the government projects going union, the registry system stands separate and apart. While my friend and certain people don't necessary support the Quebec model, I think it gives you some idea of the kind of issues that can be addressed including, as I've indicated, mandatory company identification which improves enforcement. This would all apply to non-union/union.

Our point is then everybody is on a level playing field. So that would address the concerns of your non-union contractors. They would have to ensure that there's work description, they would have to post a bond. This is under that system. We're not suggesting necessarily that -- well, we are, but not everybody here is suggesting you go that far. Technical, level qualifications, they have to show building site safety qualifications, financial qualifications, solvency criteria etc. That kind of system I think would go a long way to putting people on a level playing field.

Mr Monte Kwinter (Wilson Heights): I'd like to just follow up on this issue of the union/non-union. While you were making your comments I was sort of reading through your brief and I got the feeling -- I may be wrong -- that you were equating in many cases non-union to black market. It was like the union was on one side and everyone else was in the black market. As I say, that may be a misconception on my part, but when I read through it, I got that feeling.

The other concern that I have is that by your own figures, you say there are 65,000 as of 1989 registered as people in drywall, resilient flooring, carpentry, and of that there are about 15,000 union members. So it means about 25% of the total workforce in those sectors of the construction industry are union and 75% are non-union.

It would seem to me that if that were the case, then the work that was awarded should be awarded sort of on that same proportion, that you'd wind up with union members getting about 25% of the work and non-union members getting about 75% of the work. In your comments you seem to feel that isn't quite the way it should work.

Mr LeCompte: Maybe I should clarify this as well. The 65,000 number is equated to carpenters and carpenter foremen in the province of Ontario. The 15,000 number that I'm mentioning is in the ICI sector, in other words, the commercial sector. It does not account for the residential sector. The Carpenters' union, in all fairness, is not very heavily organized in the residential sector. I would purport to say that a very large number of those carpenters or carpenter supervisors were in the residential sector.

To give you an exact figure of non-union or black market in the commercial sector would be a very difficult thing to do. Obviously that's what this secretariat is designed to do in the future, to try to get that statistic. But it was a little misleading; that 65,000 is a full number of carpenters and that was at a period of time when the residential, obviously in Toronto and in Ottawa and certain areas, was just booming. A lot of those people would be in the residential sector.

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Ms Watson: I think it's also important to note that of those 65,000, part of the problem is it ties back into our registration system that anybody can call themselves a carpenter right now. The vast majority of the 65,000 would be people who have absolutely no minimum level of qualification.

I could walk out on the street and say, "I'm a carpenter," and set up a business, frankly, and start purporting to build houses at the moment. That is part of the fundamental problem in terms of safety etc. There's no mandatory licensing or registration and a lot of the people who are counted in that figure are not people who are otherwise qualified.

Just to clarify, I think it is certainly a misnomer or a misreading; there is absolutely no intention on our part to suggest that non-union equals black market. The initial brief that was drafted dealt very much with union versus non-union and only a portion of that brief dealt with the issue about black market. Our concern is, it's very difficult once you get into the non-union context to control the black market, whereas that problem is not the case within a unionized environment.

There are a vast number of absolutely legitimate contractors out there who operate on a non-union basis. It's becoming more and more difficult for people to do that, both unionized and non-unionized, because it's impossible to compete. That's why you'll see interchangeably throughout the brief as well we talk about fair or legitimate contractor versus black market as opposed to union versus non-union.

Mr Kwinter: If I could also get a reaction to something that has been sort of gnawing at me all through these hearings, we heard from the liquor board that there is more illegal wine being sold in Ontario than there is legal wine. We hear that the largest industry in Ontario at the present time is cigarette smuggling where effectively they're making $1 million a day.

We hear about your example when you said someone came in to collect his unemployment insurance and he said: "I'm dirty. I'm working. You know, I'm making out." I feel that unless we get a handle on this, we may be operating on misconceived numbers. Our unemployment rate may be considerably lower than the approximately 11% that is given, because all these people are working. They're just not reporting their income, but they're working.

The gross domestic product of Ontario may be considerably higher because all these guys are doing things. They're doing economic activity; they're just not reporting it. Yet governments and other organizations are working to the numbers that they've been given, that our economy is only growing by about 2.4% a year, that our unemployment rate is at 11%. Do you have any reaction to that?

Mr LeCompte: My understanding is the people with Statistics Canada, when their unemployment insurance has run out, they're no longer a statistic. That's my understanding first of all. There are a lot of carpenters in the province of Ontario who no longer have unemployment insurance -- none. They're on welfare ranks or they're in the underground economy.

For an example, our man-hours from 1990 to the present are approximately half of what we have. The unemployment in the local unions, as I said, there are 50%, in some cases 60% and 70%, unemployed. They have no unemployment insurance. They have nothing. Where are these people going? They're going either underground or the figures that you're asking, 11% -- well, you're no longer a figure if you're not on the ranks of unemployment.

The Acting Chair: I'm sorry to cut you off, but we are into a crunch and we do have people waiting to appear. Thank you very, very much for your presentation. If you'd like to leave anything that you want to leave with the clerk, I'm sure she'll share it with the committee at a later date.

ONTARIO CONVENIENCE STORES ASSOCIATION

The Acting Chair: Do we have representatives from the Ontario Convenience Stores Association? If they would come up and take their place on the chairs. Mr Pottow and Mr Egerdie. Do we have Mr Pottow? Great. We have approximately 25 minutes, gentlemen, and in that 25 minutes if you wish to answer questions, then you should judge your time accordingly. Would you introduce yourselves with your names.

Mr Russ Egerdie: I'm Russ Egerdie. I'm the executive director of the Ontario Convenience Stores Association. With me is Geoff Pottow, also a director of the association. Being part of the crunch, we will certainly move right along.

The underground economy: How big is it? What is it costing Ontarians? Our association would like to address only a portion of that, but it is a major segment, and that is tobacco smuggling in contraband tobacco.

You have our brief, which has been circulated to you. I hope you notice that it is a brief brief; it's only four pages. Perhaps we can make our discussion of it that brief as well. It's only four pages, but it deals with a massive amount of money, a tremendous amount of dollars, both sales dollars and tax dollars. There have been two additional pages handed out to you, which we'll refer to as we go along.

On the first page of our brief, the title page, there is a typo. About six lines from the bottom, it refers to "five million untaxed cigarettes." That should be "five billion." I would appreciate it if you would make that change.

Five billion cigarettes a year is 25 million cartons, and that's almost one tractor-trailer load entering the province of Ontario each day. That tractor-trailer load generates a profit of almost $1.5 million to organized crime networks each day. So this is the magnitude of what we're involved in here.

We, the members of our association, are vitally concerned. We're concerned as Ontarians, we're concerned as Canadians and we're certainly concerned as spokespeople and convenience store operators. We care about our stores, the 60,000 people who work in the stores across Ontario and the 60,000 family units whose bread on the table depends on the continuation and prosperity of those jobs.

Who are these convenience store operators? Well, he's the one who looks out of his store window at the van parked across the street and sees that someone is selling cartons of tobacco out of that van to a lineup of people waiting to purchase. This is fact. The convenience store operator is the one who lives in a high-rise and finds out that the tobacco pusher is taking orders door to door. He takes your order this Tuesday; he delivers next Tuesday -- and, by the way, he'll take your order for illicit liquor as well. The convenience store operator is also the one whose son comes home from high school absolutely marvelling that this student he knows in the school is selling smuggled cigarettes and bragging that he makes over $1,000 a week.

This is the type of thing we're talking about, and that's who these convenience store managers and owners are. They see their business falling away day by day, because tobacco is part of their sales volume. Then they lay off an employee and they make up for it by working a few more hours themselves. They see armed robbers more interested in cartons of cigarettes than in cash, because there's not much cash in the till but there are a lot of cigarettes behind the counter. They are concerned. They're vitally concerned, they're vitally worried, and they're looking to you folks in government and saying, "What are you going to do to help?"

Education about smoking and smuggling is important, but unfortunately it is not the answer. When I say that, education should continue and should be stepped up, but it is not the answer.

Tough enforcement laws and tougher penalties are also very important, and we're very pleased to see Mr Laughren proposing to increase those, but they in turn by themselves are not the answer. There is too much illegal profit to be made in this trade by the underworld for those two to have anything other than a marginal effect. This will not be stopped until most of the profit is taken out of it, and I underline every one of those words.

People refer to the province of New Brunswick, which not too long ago reduced its tobacco tax by 50 cents a pack and said that didn't cut out the illicit tobacco and therefore cutting taxes doesn't work. Well, with all respect, I don't think you send a peewee to do an NHL job. Fifty cents a pack is only $4 a carton, and when you're talking about $50 a carton in the store and $27 a carton from the guy who knocks on your door on Tuesdays, $4 a carton at 50 cents per pack is not going to even touch the illicit trade in terms of volume. Tax reductions are required. They're required by Ottawa, they're required by Ontario and they're required by every other province. This is the only way it will be solved.

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Many people have referred to the situation in the 1920s with Prohibition in the US. This is a -- I was going to say "microcosm," but it isn't that small. It's a significant parallel to what went on then, and we all know what the solution was to the smuggling and the growth of organized crime in the US fostered by that particular situation.

Tax reductions will not increase smoking. Anyone under age can already get tobacco at $3 a pack illicitly, and, as it said in an article I'll refer you to in a moment, they can get it there easier than they can through the legal channels, where age is asked for.

Tax reductions will reduce crime. If the tax reductions are significant enough, it will wipe out this illicit trade, and it will also stop the disrespect for the law. I think we're raising a generation of people -- I cited a high school student example. I don't think too many students in that school aware of this have too much respect for the law and the way it is being flaunted. Certainly, major tax reductions will kill this cancer which is eating at the very vitals of our society.

We look to the government of Ontario for leadership, and we look to the government of Ontario for leadership quickly, really quickly, because this thing is growing by leaps and bounds. It is increasing exponentially even as we sit here.

This is out of the latest issue of Maclean's, which I picked up in the dentist's office earlier this morning. It is the latest issue, December 6.

Mr Phillips: The dentist has the latest issue?

Mr Egerdie: I couldn't believe it either. Usually it's 1991. At any rate, this is the latest issue of Maclean's. There's an article in here, "Up in Smoke."

Interjection.

Mr Egerdie: Let's put it this way: I didn't pay for it. At any rate, I certainly recommend this to you because it echoes in spades what I have just said in the last few minutes.

I hope you do not feel that I am being melodramatic about this. This is truly a critical, critical item. There's only one way to stop it, and that's not with 50 cents a pack: These are major tax reductions by the provinces, major tax reductions by Ottawa. I'm sure you're aware that the province of Quebec has already approached Ottawa, saying, "We'll cut our taxes 75 cents a pack if you, Ottawa, will do something." They're considering that now.

I suspect that one year ago the people in the province of Quebec would have recoiled in horror at even the thought of a tax reduction, but, ladies and gentlemen, in Montreal today they estimate the sale of illicit tobacco at 70% of total volume. Ontario was 17% in 1991. It was about 25% last year. It is now estimated to be between 30% and 35%. I submit to you that we will soon be in the same group as those folks in the province of Quebec.

Action is needed, and needed desperately. Thank you for your attention. I hope I've been brief.

The Acting Chair: We have approximately 15 minutes. That means five minutes per caucus, and I'm starting with our caucus.

Mr Perruzza: Really, it's just one question that I want to ask. I know that you focused basically on cigarettes, but I see here you're the Ontario Convenience Stores Association. I want to ask you, convenience stores are really a cash business, a cash sort of enterprise, right? You go in and it's $2 and $3 and $5 purchases and 50-cent purchases, and that kind of thing. Would you support more stringent accounting for the amount of cash, or the enforcement of a system that would force convenience store owners to more accurately report the income and the sales that they actually generate?

A case in point: I don't know if either of you have been to Italy, but every time a transaction takes place, the store owner or the person who's running the outfit is obligated to hand to their customers a receipt, and they both at that point have an obligation to that receipt. They have a whole finance department which can check the receipt on the customer end and can check the receipt on the entrepreneur's end, let's call it. They both have to take that receipt and that accounting far more seriously than I think we're forced to do here. Would you support that kind of initiative?

Interjection: It's paperwork.

Mr Perruzza: It's not paperwork, as my colleague here says. It's really a cash register that's serial-numbered and can actually be looked at and is looked at on a far more frequent basis than what we have here in Ontario and in Canada, quite frankly.

Dr Geoffrey Pottow: May I address that? Most of our membership are chains, and of course we get audited by the provincial tax department, because we record all our information. As you know, there's a very simple paper trail from where you buy your cigarettes. They know how many cigarettes you buy, how much pop you buy, so there's an easy auditing paper trail to follow that. The auditors do that.

In the case of the independents, again this is where you lose control of the economy and lose control of your tax, because when they go and buy it from the smuggler and then sell it underneath the counter, a lot of these independents, the only way they're stopping going bankrupt is to turn to the underground economy.

We have a large chain of stores. My purchase price for a carton of cigarettes is around $40 a carton. How do I compete if I'm an independent buying them? I've got to pay a wholesaler some profit and then I've got to carry that inventory. I've got to guard against it being stolen, so I have to have some reserve to look after my loss when somebody breaks in and steals that carton. How do I compete now when a man comes up in a van and says, "How many cartons would you like at $25?" I put it to you that if you're an independent businessman going bankrupt, that's an awful hard thing to walk away from.

Mr Perruzza: So what you're saying is you're confident that under the current rules and under the current system, convenience stores are reporting very accurately at the end of the year their total sales.

Dr Pottow: I'm saying that they're reporting their total sales of legitimate sales, yes. I'm also saying that non-chains -- because only the chains get audited; you don't have enough tax auditors to audit every mom-and-pop store around -- the only reason they're surviving against these smugglers is to run a cash business on the side with the underground economy. I put it to you that you could not police it. If the whole of the tax department just looked after convenience stores alone, there wouldn't be sufficient people to police that.

Mr Perruzza: How do they police it in Europe?

The Acting Chair: Mr Perruzza, I'm sorry, but that uses up the time. I apologize. You could speak to him later.

Mr Phillips: This sounds even more serious than we've heard before in that it's potentially running the risk of putting honest business people in the position of either going under or becoming dishonest. Am I overstating?

Dr Pottow: In the last year we've closed approximately 50 stores, and in the last two years we've closed 100 stores. I predict that we will increase that rate in the next two years, because we cannot do business when a product that used to be around 28% of our category is now down to 20%, and by next year it will be about 15%. We cannot continue doing business, offering employment to these people and paying the rents that we pay. So as these stores come due we close them, or we actively close them. We're basically being driven out of business by smugglers. It's as simple as that. We've been in business for 37 years.

Mr Phillips: So it's literally bankrupting --

Dr Pottow: Independents are worse.

Mr Phillips: The solution of reduced taxes is always challenging for a variety of reasons, and I think your brief says that's the only solution. Are there other things that could be done? Imagine, for example, if you had a package of illegal cigarettes in your hand that was clearly distinguishable. Would that be a solution?

Mr Egerdie: It currently is.

Dr Pottow: It is now.

Mr Egerdie: It has a yellow wrapper.

Dr Pottow: They have a band around it which says "Not for sale in Canada."

Mr Phillips: Doesn't that come off right away?

Dr Pottow: You can take it off right away, but if you're talking about the wholesale business, people will not buy even a smuggled cigarette that has the cellophane removed because it could be stale. Within a week of removing the cellophane, the product goes stale. It's like buying a scalped ticket. You want to make sure it's for the game and you're going to get a seat. You want to make sure that the cigarette is a fresh cigarette.

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Mr Phillips: I'm just thinking, I as an individual have that pack in my hand and once I take the yellow off, it's not -- would that be of any assistance?

Dr Pottow: The point that we're trying to get across is that if you accept, as we are convinced, that at least 30% of the market is underground, and it's probably going towards 50%, then a 30% tax reduction is revenue-neutral. If by reducing the tax 30%, federally and provincially, you could stop the smuggling, then you would collect tax on 100% and you'd get the same amount of dollars.

Mr Phillips: What does that mean for the retail price?

Dr Pottow: The average retail price would go up, of course, because you would be selling it, retailing, through legal stores and collecting tax.

Mr Phillips: But if you reduce taxes by 30%, do you get it close enough to smuggled that you could legitimately say that kills the smuggled market?

Dr Pottow: That's right. We then face a bigger problem, because we now have such a big distribution setup. The distribution channel of the smugglers is better than the manufacturers of cigarettes. They have easier access to the illegal market than the manufacturers of cigarettes have to the legal market.

What's concerning me is that even if you nip this problem now by decreasing taxation, there's such an enormous crime syndicate in place that they will start getting their cigarettes by knocking off the local Mac's or Becker's store, because they will want to find this cheap product. So we will be facing a much harder thing of stopping the break-ins then.

Mr Wiseman: You can sell it cheaper if you steal it.

Dr Pottow: Yes. The terrifying thing I see is that it's just growing. This graph is frightening to me. This is 1992, and 1993 is up here somewhere. We're just quoting these figures. This is put out by an accounting firm that checked all the export figures and so forth.

Mr Phillips: Your last point seems strange to me: if we reduce the taxes, then we increase crime or something.

Dr Pottow: I can control break-ins. I can put alarms in. I cannot control smuggling. I don't think the Canadian army can control smuggling. They have better weapons on the reserves than the army's got, more modern.

Mr Carr: Thank you very much for your presentation. It's certainly a very difficult question and something you're facing every day.

I was just interested in some of the measures that were introduced by the Minister of Finance, the recent ones this week. What are your thoughts on what he's proposing to do? Do you like it? How much of an impact do you think we'll have on it?

Mr Egerdie: There are three items that come to mind. The first was to eliminate the sale of tobacco through pharmacies. This was in the newspapers. I believe it was about three and a half years ago: It was actually the Ontario Pharmacists' Association that passed, as one of its own association regulations, that it was going to get out of the tobacco business in three or four stages. So in fact what the government has done is simply carry through on a resolution passed by the pharmacists themselves. That doesn't seem to have made too many of the papers within the last few weeks.

The second point is the elimination of coin-in-the-slot cigarettes. That's an extremely minor part of the market. The industry feels it's something in the order of 1% of sales. I don't think that is an important part of it. I can't really address that.

The third point was to greatly increase the penalties for having illicit tobacco. I believe the cutoff was 50 cartons. I'm recalling from memory. I think 50 cartons is a massive amount of tobacco to have within your possession if you are not a retailer or a wholesaler of a legitimate nature. I'm not sure I think 50 is low enough.

As far as the penalties are concerned, I'm recalling from memory that, for example, for selling tobacco to a minor, I think the minimum penalty was something in the order of $100 and the maximum was $25,000. They have increased that maximum to $75,000. That should be looked at carefully, because I think for anyone who has been charged and convicted under the old system of fines, I suspect -- I'm not sure of this -- that the fines would be pretty close to the $100 rather than the $25,000. Therefore, increasing it to $75,000 is really more for appearance's sake than for actual effectiveness. Does that answer your question, sir?

Mr Carr: Yes, that was very helpful.

Dr Pottow: If I could quickly add to that, I think it's admirable that they enforce the police to be able to charge people who are openly flouting the law, but I think the problem is much deeper than that. I think it's a small step in the right direction, but the only way to eliminate the violence and the whole smuggling is to get it closer to the US price. You have Clinton proposing a tax increase, and with the low dollar, it's conceivable now. You could do it in a revenue-neutral way.

The Acting Chair: Mr Jamison, you're in luck. There's two minutes.

Interjection.

The Acting Chair: Mr Jamison is begging me for one quick question, Mr Carr. Would you like to share your time?

Mr Carr: Yes, I'll share.

The Acting Chair: That was very kind of you, Mr Carr.

Mr Jamison: I'd like to thank Mr Carr. I represent a tobacco-growing riding, Norfolk, and there's a tremendous impact because of this. But the question I'd like to ask you is, in your mind, at this point, how many of your own normally law-abiding members are participating in selling the product illegally?

The reason I ask is that just yesterday I ventured into a corner store, and I am a smoker, and there was a lineup of two or three people at the counter. Two of these people were buying cigarettes and there was an obvious transactional difference between mine and the person before me in the fact that I bought cigarettes off the shelf with the yellow band on them and the two people who preceded me received their cigarettes from another location around the counter with no similar markings on them. I understand the pressures on your people, but what degree now is the participation within your own membership?

Dr Pottow: First of all, we should clarify that our association is primarily made up of the chains -- Becker's, Mac's, Hasty Mart, Variety Food Fair -- and I would say the amount going on there is relatively minimal, because we're looking at, last year we lost $5 million. This year we've done drastic price changes. We look weekly at the sales decreases, and if we see a store whose sales decreases are in excess of the average, then we check it with our own auditing staff. So within our chain, I don't think much goes on.

I'm with the Becker Milk Co and we have a dairy and we have other things to support us, but of the independents, I would estimate that at least 50% -- a lot of those independents -- are using the underground economy. In all honesty, it's hard to compete with them, but you can sympathize with them, because that's the only way they can get any business.

Mr Phillips: Have you reported --

The Acting Chair: I'd like to thank you very much for appearing before the committee. We do appreciate it. It's been a very interesting brief.

Mr Wiseman: Sounds like that's the price of being an MPP.

Dr Pottow: Just on that reporting note, we're talking about the fraud hotline. I think there could be a similar sort of thing with the police with smuggling, because as a business I burn when I find out that a recognized establishment like a local golf course I went to blatantly sells smuggled cigarettes across the bar. When it gets to that proportion, I will be happy to turn these people in, and I think a lot of other legitimate operators would be too, because they're seeing their businesses going bankrupt, basically.

The Acting Chair: Thank you. I do appreciate your appearing here today.

Before the members rush off, I'd like you to take a look at your resources. You should have two resources in front of you, Proposed Outline: The Underground Economy in Ontario, and the other one was Summary of Recommendations on the Underground Economy. Perhaps you'd look through the two of those before this afternoon at 3:30. We'll be discussing those this afternoon.

This committee will stand adjourned until 3:30.

The committee recessed from 1201 to 1536.

The Chair: The standing committee on finance and economic affairs will come to order. Having heard a comprehensive set of deliberations over the last few weeks with regard to the underground economy, at this point it's up to the committee to make some recommendations and present a report to the House. If anyone would like to make any opening comments with regard to that, the Chair is in your hands.

Maybe our research person, Elaine, would take us through what she has detailed in some of these reports she has already made available to us. We would appreciate that.

Ms Elaine Campbell: The members have before them two documents that I have prepared. One is a proposed outline for the report. The second is a summary of the recommendations that were made by the various witnesses who appeared before the committee over the last month or so.

The proposed outline is very much that, a suggested structural outline with an introduction, a section on definitions, contributing factors, measurements, reasons for concern, as well as some corrective actions. Those sections have been broken down further into subsections. I'm open to any suggestions as to what else could be done.

Mr Phillips: That was a good start, but I have some suggestion; some may be some nitpicky things and others more important.

My logic flow puts "Size of the Problem" ahead of "Contributing Factors." That would be my own personal preference on this one. What I think we have to be careful of is assuming it's just the three things. The net impression I got from all the witnesses was that, first, there's a fine line between the informal economy and the underground economy and that probably both of those things are contributing to lack of revenue -- one is completely legal and there's nothing wrong with it -- and that in some respects we focus so much on the tobacco that we may ignore some other things.

I think the first thing on which we could do the public a service is to begin to scope out the magnitude of the problem, of the situation. I think we heard a range of opinions, from 3% of the GDP to 20%.

Mrs Karen Haslam (Perth): Could I add something? It's also the difficulty in getting a handle on how big it is. That came across time and time again, that they could make estimates but it was such a difficult thing to make estimates on. Maybe we can add that too, the difficulty in that whole process of estimating how big it is.

Mr Phillips: I thought one of the more -- they were all sensible, I guess. But one of them, as I recall, was the Quebec professor who said you almost have to figure it out sector by sector, that that will take some judgement.

In fairness to the research staff, you are essentially one person, or two people, trying to deal with something departments of economics have spent years dealing with, so I think we have to be realistic about how much we can achieve.

In any event, I hope we can scope the thing out and reach some conclusion on the range it might be, on how you can begin to get an order of magnitude on it. Maybe we should touch base once again with the Finance people, because I think they had said they would get back to us with some of their justification on the revenue side. For example, I think you can marry lost tobacco revenue with some estimate of tobacco consumption and begin to say that over the last three years tobacco revenue has dropped, and you would have expected it to have dropped due to the number of people smoking.

Anyway, chapter A, to me, is size of the problem, defining the problem and saying, here's the order of magnitude. I have a feeling one of our recommendations might be that we can only get it into this range, but it's maybe worth somebody spending some time on getting it more definitive.

Chapter B, to me, is the contributing factors. That's just my own judgement. I haven't thought it through enough to know whether these are the right three contributing factors or not.

Ms Campbell: They're there as suggestions.

Mr Phillips: Yes. I think they might be the right three. I would say perceptions of government would be -- well, the economy is the easier one for me to comment on. I think the economy is changing, and part of it is contributing to the informal economy and part of it is contributing to the underground economy. I don't think there's much doubt but that taxes are playing a role in it. People certainly use perceptions of government as a reason to participate in it.

"Reasons for Concern" I think may be fine to make the C chapter, although it flows almost logically out of "Size of the Problem." "Corrective Actions" to me, was not a bad way of segmenting it. I have a feeling that part of the solution will be trying to get some consensus from people that it's in their best interests to deal with it. I don't know whether that fits in there or not. The equivalent is that in drinking and driving, the big solution there was that you got an overwhelming number of the public buying into the fact that: "This is a problem that we all have to solve. If you're going to drink and drive I'm going to do a lot of things to stop you from drinking and driving." That would be my instinct on "Corrective Actions."

Then I think it's a matter of trying to get pen to paper, in my opinion, and all of us can start to hone it a little bit more. I thought the summary stuff was worthwhile.

The Chair: Mr Carr is on my list.

Mr Carr: I was just going to say I agree with Gerry. What we should do is take the first part and deal with the amount of the problem. The only thing I would suggest is that when it comes to recommendations, I'd like to get a little bit stronger. Personally, I'd like to take a look at some reduction of taxes to see if indeed we could get some of the revenue, but I don't think, as a committee, we're going to get that.

One thing that I think would be a powerful message -- in a non-partisan sense; not to blame any government or even this government -- is just to somehow word it that we've reached the point in taxes that we can't tax any more, that indeed any more taxation is going to just produce less revenue. I think the Treasurer has said that; I think he and the Premier have said there won't be any tax increases. So I don't think the government members need to go out on a limb if they were to say in this report that the finance committee of the Legislature calls for no increase in any taxes. I'd like to include it to say fees too, but the government members may not be able to include that.

I say this in a non-partisan way. I think it would be a powerful message this committee could send out as one of the recommendations, saying one of the big reasons we have the underground economy problem is because of taxation. Somehow we need to touch on the enforcement, but I think the government is going to deal with that, as we saw with the recent events. I think they're going to do that on their own, because I think they see that as the big issue. So my recommendation would be for this committee to call for no tax increases in the next budget. I don't think we need any preamble discussing the problems of taxation, whether it be the federal government or provincial or municipal. That would be my recommendation.

Personally, I'd like to see us go out on a limb and take a certain segment -- I wasn't sure which one -- and reduce some of the taxes to see if in fact we can get more revenue, as a lot of economists and people who came forward suggested, but I don't think the government will do that. As the second-best position, I would like to see us very strongly come out with a recommendation to the government that it not increase any more taxes. We can argue the length of time: I'd like to see it for the end of the government's mandate, but as a compromise, maybe we'd suggest for a year.

I don't know what the government members would say to that. I see Karen with her hand up. I think the Premier and the Treasurer have already said there won't be any in the next budget, although that may have changed as a result of what may happen with transfers and so on. But I would like us to make that recommendation and go out a bit on a limb and actually do something constructive and make a hard recommendation rather than just talk about the problems. I'd like to table that and see if the other members are willing to do that. If so, I think we may come out with something very practical in our recommendations.

Mr Kwinter: Actually, I agree with everything that has been said. I'd just see one area where I think we should break out one segment. When we talk about the contributing factors and we say the economy, I think a message that came through -- we heard it today; we've heard through others -- is that one of the major contributing factors to the underground economy is the fact that there are people out there who have skills but can't get any work, and because they can't do it through the regular employment stream, they're offering their services at reduced rates in order to just earn a living.

We keep hearing that there's going to be a jobless recovery. If we talk about the economy without singling out the employment component, even when the economy improves and regardless of what we do, I think there's still going to be a very serious imbalance in the employment sector. These people are continually going to try to earn a living somehow by offering their services at reduced rates and, as a result, will continue to perpetuate that particular segment of the underground economy. I think it's something that we should address as a separate issue.

Mrs Haslam: I read over what the Ministry of Finance came in with, and one thing that struck me particularly was the fact that they looked at lowering taxes on cigarettes and said their conclusion was that it wouldn't have any great effect on increasing the revenues at all or taking care of that particular problem, mainly because it was intergovernment. It dealt with federal taxes and provincial taxes, and we are a lower percentage than federal taxes. We are the lower percentage of taxes on tobacco, in particular.

Personally -- I may be overruled by my colleagues -- I don't feel that would be a recommendation I would support, saying to the government that we don't want -- if the Premier says that, fine, and if the Minister of Finance wants to do that, that's fine. I personally don't feel that way and wouldn't feel comfortable making that recommendation out of this committee, but I do agree with what Mr Kwinter has said around unemployment.

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When Ms Caplan was here we talked about the social aspects of the problem and whether, once you get into this pattern, it stays. We didn't get a lot of answers out of any of the people we talked to about that. We thought we might get some from some of the university professors and we really never did get any answers, at least I felt I didn't get any answers on that particular issue.

I agree with Mr Kwinter that we have to look at unemployment as a factor and the job losses and whether, if the recovery does come -- and you're saying a jobless recovery to some extent, but I don't think there's ever a jobless recovery -- and if things get better, do we feel that, like Sunday shopping, some of that aspect will mellow in this problem. I'm just passing those comments on. I personally don't agree with Mr Carr, but I do with Mr Kwinter. So one out of two isn't too bad.

Mr Chris Stockwell (Etobicoke West): Can I ask a questions?

The Chair: Sure, Mr Stockwell. You go right ahead and ask a question.

Mr Stockwell: I appreciate that. We're examining the underground economy and the concerns and you want to address the unemployment issue. Can you relate that for me again back to the underground economy?

Mrs Haslam: It's what Mr Kwinter said. Mr Kwinter said that when there is unemployment, people tend to look to the underground economy for their finances because, as he said, they are not employed in certain areas, and I agree with him in that. I think that's been a major factor. The factors of unemployment are varied, but unemployment as a factor has been a major factor in the growth of the underground economy.

Mr Stockwell: So, in essence, if we could solve the employment crisis we could substantially go quite a distance to solving the underground economy problem? That's a question.

Mr Kwinter: If I may join this conversation.

The Chair: You certainly may.

Mr Kwinter: My particular point was that most economists agree that regardless of what happens to the growth in the economy, we are looking for a 10% unemployment factor to the year 2000. There is also a situation where, notwithstanding that the unemployment rate is somewhere around 11%, that only reflects on the people who are looking for work. There are people who have dropped out of the labour market completely and they are no longer looking. So there is every indication that the unemployment rate is considerably higher than 11%.

I'm also saying that a lot of these people -- some of them are unemployed and are doing nothing about it, but there are others who would love to work but can't because they can't get a job so they're offering their skills and their services in the underground economy. We have tended, in our hearings, to talk about cigarette smuggling and talk about the home renovation business and talk about alcohol smuggling as major contributors to the underground economy. I'm suggesting that a major contributor to the underground economy is that there are people available to do services who are offering their services and people are looking at them and saying, "Why not?"

We had a situation where the immediate past president -- he's a renovator but he is the past president of the --

Mr Phillips: Home builders.

Mr Kwinter: -- Ontario Home Builders' Association, who told us that he had quoted on a bathroom renovation and he'd quoted $20,000 and someone came along and offered this particular person the same job for $7,000. He would have us believe, and I have to take him at his word --

Mrs Haslam: Actually, the quote was $7,000 less than his. That's what it was.

Mr Kwinter: No, because I questioned him on it.

Mrs Haslam: I thought it was $7,000 less.

Mr Kwinter: No, he said it was $7,000 against $20,000, and he maintained that he was able to convince this person to spend the $20,000 because of the benefits that would accrue to everybody, the taxes and things of this kind.

Interjections.

Mr Kwinter: No, I'm serious.

Mr Stockwell: Do you believe this guy? I've got a bridge to sell you.

Mr Kwinter: Listen, that's the point I'm making.

Mrs Haslam: Don't they need you in the House, Mr Stockwell?

Mr Kwinter: And I said to him either his information is incorrect or he is one hell of a salesman. That was the point I was making.

Mr Stockwell: He had "Sucker" on his forehead.

Mr Kwinter: There are very few people who would look and say: "You know what? You're right. I should pay you the $20,000, because why should I pay this guy only $7,000 and do all these terrible things that you say I'm doing?"

The point I'm really trying to make is that there are people out there who are prepared to do these jobs only because it's the only way they can get any kind of an income. That is contributing, in my opinion, to one segment of the underground economy. I think that particular situation should be addressed. I'm not say we can resolve the unemployment situation, but I think it should be recognized that this is a contributing factor to one segment of the underground economy. That was the reason I raised it.

Mr Carr: I think I heard Karen say that she wasn't in favour of a recommendation freezing taxes, so the question I've got -- because I think the biggest problem we've got is the taxation issue; we can agree to disagree -- if not, do we propose doing some type of minority report on this too? I think it's more powerful if you can get a consensus. But if not, what is the committee's feeling with regard to, are we looking at some type of minority report for people who may wish to have a difference of opinions? Is that what we're looking for, if we can get a consensus, great, and if not, we'll go that route?

The Chair: If you or anyone else on the committee chooses not to agree with the final report of the committee, then you certainly may, under the standing orders, make your own report.

Clerk of the Committee (Ms Lynn Mellor): A dissenting opinion.

The Chair: Yes, a dissenting opinion that can be tabled at the same time.

Mr Carr: I don't know whether Gerry and Monte are in favour of no taxes too, and maybe some of the other members too. I'm just trying to get a sense of the government and what it proposed to do too, because I think it's more powerful if we can get a consensus on this. If not, then it gets into political bickering and we do a minority report that nobody listens to. I really think this one can be a non-partisan issue and we can address it for one of the first times in a committee in saying, "This is what we've heard; it is taxes"; not point fingers, but we just have to hold the line on it. If we can't get the government to agree, then I guess we're going to be stuck with ending up with a minority report.

But I feel very strongly that we could send a very good message if we can be united on this. I don't know if Karen's speaking for the government or whether we can get a consensus, because I really believe that's what we should have in the report, calling on the government to have no increase in taxes and saying a year and seeing if we can get consensus on that.

The Chair: We certainly can debate that before it goes into the report. The thing I think is interesting here is that we've had a considerable number of people come forward before this committee to make presentations. Their message wasn't entirely consistent. I think we would all agree with that. Indeed, some people said, and I remember this, that taxation wasn't the problem. Now, maybe the majority of the people did. So if we come to some conclusion as a committee, we probably could have come to some of the same conclusions without having heard all the people who came forward with their experience and learned information.

However, it's certainly entirely up to this committee to decide what kind of report we're going to make. It's going to be a combination of our own, no doubt, opinions with regard to the underground economy, through either personal experience or just a lot of reading maybe, and trying to better understand it, or it can be a result of just the people who made their presentations, in which case I would suggest to the committee that we're not going to be consistent, because obviously everything we heard wasn't consistent.

Somehow we have to come to a balance and a decision. I suggest that if we can't send a report in that we all agree on, then it's going to be necessary for there to be dissenting opinions if we can't agree with a total package. Or maybe we could say, "We agree with this total report except for certain parts of it." I don't know.

Mr Phillips: This is the best way to spend our time, to drive the report as far as we can, get the words down and see if there isn't a way of accommodating --

The Chair: The most?

Mr Phillips: Yes. I don't think we can ignore the tax thing.

The Chair: No, I agree.

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Mr Phillips: It may be that you say there is a need to prove or disprove this. What I heard in the tobacco one is that I don't care what we do, but if there's a $4-a-package difference between Canada and the US, long term, we've got a problem. The problem can be solved, maybe, by getting the US to take their price up, by doing something. I don't think we can ignore that the fact is our tax revenue has dropped dramatically while our taxes have gone up. That's just a statement of fact. I would suggest that rather than trying cross-the-bridge-today gearing, maybe we're better to see if there is a way that we can get a set of words around this that we can all agree to, then we'll know what we're finally quibbling about.

The Chair: If I may, there are many commodities that drive the underground economy, and many services as well. Certainly as we deal with them individually, there may be different values or different opinions as to what drives this into the underground economy. Indeed, in some instances, I wouldn't disagree with you that it's taxes. In others, it may be the avoidance or evasion of paying taxes on services or incomes.

Mrs Haslam: Did you not see my hand before?

The Chair: No; I'm sorry, I didn't.

Mrs Haslam: Obviously not. Okay.

The Chair: But you can be sure, I'd never ignore you.

Mrs Haslam: I'm sure you won't.

I would have to agree --

Interjection.

Mrs Haslam: If Mr Stockwell's going to be rude, I'm going to ask Mr Stockwell to be removed. Were you being rude, Mr Stockwell?

Interjection.

Mrs Haslam: Yes, I will. I'll do it myself. I'll get my muscles built up here and come over there.

Mr Stockwell: Get a hold of yourself.

Mrs Haslam: No, I'll get a hold of you.

I would agree that there is a perception of fairness and when we look at the Fair Tax Commission report coming out or taking a look at where those taxes are divided in our society, I think that should form part of our report, which I haven't mentioned because I thought it would be mentioned under the outline that is here.

I assumed that would be part of what was in the report because there were certainly comments about the fairness and the perception of that fairness, and I assumed that your "perceptions of government" would also include perceptions in the tax system, perceptions of the fairness in the tax system, because we certainly had enough people come in and talk to us about they see this and they see that, and they believe this and they believe that, so I assumed that would be part of this report.

The Chair: At this point in time, just so that the Chair is clear what's happening here, we are giving direction to the research officer, Elaine Campbell, to go back to her office and --

Mr Phillips: Workstation.

The Chair: Workstation, and in more detail and with the specifics that we've suggested here today come back with a report that we can base any further deliberations on. Is that not good?

Mr Stockwell: But it must deal --

The Chair: Okay. In that case, Ms Campbell has some further questions.

Mrs Haslam: I think that Mr Carr wants a strong recommendation and I would agree that we should say very strongly that they have to get a hand lock on it. They should certainly do much more in the research area because part of the problem was we didn't have a handle on the research, and even the financial ministry people came and said, "You know, we're interested in what you ask this group and this group and this group, because we want to see what they are saying." I think part of the recommendation would be that they should get a very strong handle on the economy in this area, look into it very seriously.

The Chair: Ms Campbell, did you want to ask the committee some more questions?

Ms Campbell: Yes, I'd like to ask some questions of the committee for the sake of clarification. Am I assuming that the committee is agreeable to the outline, as it appears on the document, that you all have in front of you, with some minor changes in terms of the order? It's my understanding that the members would like the section "Measurements" to appear after "Definitions," followed by "Reasons for Concern," then into "Contributing Factors."

Mr Phillips: That would be fine with me.

Mrs Haslam: I think that would be a good idea too.

Ms Campbell: Under the section "Measurements," I have a subsection "Home Renovations." After the presentation this morning by the Carpenters' union, I was wondering if it might be appropriate to change that subheading to "Construction," discussion of construction as opposed to specifically "Home Renovations"?

Mr Phillips: My only concern with having those three is that I think that it implies that it is just those three. I think there's something broader at work.

Ms Campbell: Do you feel that there should be something in the introductory portion of that section to the fact that testimony was heard from representatives of a number of groups and these have been chosen as representative of a larger problem?

Mr Phillips: That would be my feeling. I think the very first witness we had was with the ministry people, I think what stuck in my mind was the one saying that, in his judgement, the biggest underground economy occurs in the personal income tax area.

Mrs Haslam: It's not covered in here as a subtopic except when you get down into "Corrective Actions." You talk about taxation under "Corrective Actions," but it is really not part of the problem under "Contributing factors." Well, it is under "Tax System," I suppose. We don't deal with it as a specific sector that we're looking at.

Ms Campbell: Is it your suggestion then that there be a subsection under measurements dealing exclusively with taxation?

Mrs Haslam: I'm not sure we have enough information to make it a subtopic. That would be my concern. I don't feel that we covered it extensively in order to make it a subtopic. Everyone who came in certainly talked about one of these three. It just happens that's the way the presenters ended up coming in and talking about three very evident pieces in the underground economy.

One of the first times that we had people in, we tried to talk about other forms. But these were certainly the most evident ones they had the information on. That's what we got most of the information on. Nobody talked about retail outlets or going in and paying cash, or flea markets even, as a way of going and paying cash and getting deals. There are many convenience stores or sellers that deal in merchandise that is not used merchandise like you'd find at an auction sale or something like that. But that's part of the problem in the larger context of it. What we heard were three areas and you've captured those in there.

Ms Campbell: Am I also to understand that there's some interest in focusing most particularly in the section on unemployment listed under the economy in "Contributing factors"? I think Mr Kwinter mentioned making reference to the fact that it's expected there will be a jobless recovery.

Interjections.

Ms Campbell: Are you content with the way it's presented there now?

Mr Jamison: I think what Mr Kwinter indicated was that there was an area I believe he mentioned really fascinated him, and that was considering the prospective size of the underground economy, what effect would that have on the point where our unemployment is at a certain rate and possibly might be even lower? Is that not right?

How does that impact those figures that really revolve around unemployment and the GDP and so on, and also the contribution then to various safety net programs that are out there: UI and even as far as welfare is concerned and tax dollars?

Mr Carr: The first part's fine, I think, the way you've got it laid out as far as I'm concerned.

Just in the other points for consideration, a couple that I wanted to make: When it talks about tables and diagrams, one of the things I think would be helpful would be to have a diagram in there of the total revenue of the province going back about 10 years, which would probably include all three parties, just to show where we've come in terms of the revenue growth in the province -- graph form, very simple -- so people can look at it and see. I suggest 10 years just to round it off, back to 1983, seeing what the revenue was, where it goes. I think that would be fairly easy to do.

Mr Wiseman: It's in the budget.

Mr Carr: Yes, it's in the budget; just to have some understanding of where we're at with revenue.

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The other thing I think we should include in there is something with regard -- you say the use of international and national comparisons, and I'd like to see something in there comparing our taxes to some of the other jurisdictions. I think that can be done because if I'm not mistaken some of the people brought some of that information in, I think even the Ministry of Finance brought it in, comparing other provinces. So that's fairly easy for Elaine to do.

When we talk about other jurisdictions, the ones I would suggest is if we maybe took the comparison, the same categories, versus Manitoba and then also include our major trading partner and our real competition, which is the United States. I would suggest we pick maybe a couple of Great Lakes states, alphabetically, Ohio -- who cares -- Pennsylvania, maybe Arizona, whatever, a couple of the southern states, to just see where we compare tax-wise versus these other jurisdictions. I think that would be very helpful as well.

The rest of the report I think is good. If we put those two things in under the graphs and tables and international comparisons, I think that would be helpful, that we could put in the back, and I would suggest we do that. Everything else seems fine to me the way you've got it laid out, and I want to compliment you on the fine job, Elaine, that you did in putting that together because I think it's well laid out. If we do that, then we can come back and debate what we'd like to see in the recommendations because I understand that will be the contentious issue, what we're going to do with taxes and so on. So that would be the only thing and if you could do that, I'm happy with it.

Ms Campbell: I've included the reference to the use of tables and diagrams thinking specifically of a number of the presentations that have been made, which included graphs and tables that the witnesses had prepared on their own.

Mr Carr: Yes, so it's easy for you.

Ms Campbell: Would the committee like to include the graphs prepared by witnesses or is there any interest in including that type of information?

Mr Carr: I would just obviously like to see if maybe you'd just confirm that the information is correct. I don't want you to get into doing a lot of work, but by the same token, we don't want to put something in because somebody happened to say it. I think we trust you to be able to verify it and then use whatever you -- and you've received a great number. I'd leave it up to your discretion to see the ones that you'd like to include.

Mr Wiseman: I'm not exactly sure what Mr Carr is driving at with respect to wanting this comparative analysis, other than to maybe try and see what the tax burden is on both sides of the border. I think the Ministry of Finance actually does that. But one of the problems that I find with the Ministry of Finance numbers is that they don't do it all, because the United States cities have both an income tax for personal income tax and a business tax application that is applied that we don't do here.

Mr Carr: Let's get a bottom line.

Mr Wiseman: That's very difficult to do because every city is different. Detroit may be different from Pontiac and so on.

Mr Carr: Let's pick five cities.

Mr Wiseman: And Buffalo and so on and Rochester, they may all have different tax rates than these two areas.

The other thing in terms of this -- this is going down a whole different road -- is that putting an end to the underground economy will have consequences in itself in terms of what will happen to the economies of these regions. It's kind of like taking the heroin away from an addict in some respects. I was talking to Mr Kwinter earlier about this briefly and we should be thinking about this, that the money that's being injected into eastern Ontario, should it dry up, what would be the consequences for legitimate businesses that are really having their livelihoods sustained by the underground economy? For example, we heard that 16-year-olds come into a Ski-Doo place and buy four Ski-Doos with cash, or buying cars or buying housing appliances and so on. They won't be able to do this at the end of the day, and I'm not arguing in favour of the underground economy but let's have a complete picture.

Mr Stockwell: That's the number one reason you have the Mafia in places.

Mr Wiseman: No, I don't agree with that, but I think we don't do ourselves any favours by not taking a holistic approach.

Mr Kwinter: The Mafia, at least they're organized. Organized crime is smarter than unorganized crime.

Mr Stockwell: They spend smarter.

Mr Wiseman: I think we heard pretty well from the convenience store people how organized the economy is here with respect to cigarettes. Their fear, which I think we haven't really talked about, when they said this, was that if you put the cigarette levels -- the taxes and costs -- at exactly the same for the legitimate as against the illegitimate, the crime network is so well ingrained that they'll start to knock off the stores to find cigarettes to sell so they can continue to sell at those prices.

I think we have to deal with that, or we have to say at least that these are issues that need to be looked at. I know that Chris doesn't agree with me.

Mr Stockwell: I've just got to get it straight, that's all.

Mr Wiseman: Do you want me to go over it really slowly for you?

Mr Stockwell: No, you went over it slow enough. I just want to be sure.

Mr Phillips: It can be like a Jobs Ontario thing, a bridging thing, until they get back on their feet.

Mr Stockwell: Yes. We should concern ourselves, because if we do happen to close down the underground economy, this committee, and it's possible --

The Chair: It's probably going to happen tomorrow.

Mr Stockwell: Probably -- we may well close down the legitimate businesses that are operating because of the benefit the underground economy brings. Oh baby, that's a tough one.

Mr Wiseman: The other group of people that brought that forward were the OPP.

Mr Stockwell: You open that Pandora's box, you'll never close it.

Mr Wiseman: Just for Mr Stockwell's information, this issue was raised by the Ontario Provincial Police, and the police from Cornwall as well, in that what they were saying is that if you get rid of this part of the economy, they are going to look for other sources to deal illegally: guns, cocaine, as well.

They raised the issue about being concerned about this. If we do as Mr Stockwell says and not even worry about this Pandora's box, then fine, if that's what the committee wants to do. But I think we need to at least be cognizant of it.

Mrs Haslam: I wanted to go back to something Mr Carr --

Interjection.

Mr Wiseman: They may not agree. You may not have to do anything about it.

Mr Phillips: I think politically it will be mildly difficult for us to have a help program for the people who are hurt by the underground --

Interjection: Put out of business smuggling.

Mrs Haslam: Could I get back to the report, Mr Chair? Mr Carr was asking for a comparison of tax bases. If that's the case then, I'd also like a comparison of the social programming that comes from those tax bases. That becomes too much for, I believe, Ms Campbell to look into.

If on the bottom she is talking about inclusion of tables and diagrams that came from the groups that were here, then that's not so bad. I believe that's what she was saying; there were many interesting tables and diagrams. Mr Carr said, "At least make sure they're accurate before we use them." But if you're going to ask the research person to go off and do a comparison of tax bases, it becomes an extra job, and if you're going to do that, then I'm going to ask that we compare also social programming and the level of social safety nets that are in place from that same tax base.

Mr Carr: Why don't we just agree that ours is the best in North America, and we can put that in there --

Mrs Haslam: Great.

Mr Carr: -- and at a bottom line --

Mr Stockwell: Right at the bottom.

Mr Carr: -- say, "We have the best social programs in North America," and we'll all agree --

Mrs Haslam: Then why don't we just say that the taxes in some southern states are much lower than the taxes in Ontario?

Mr Stockwell: I think he's talking about the border states as well, because clearly there's a competitive edge here.

Mrs Haslam: I just love Mr Stockwell's explanations.

Mr Stockwell: Thank you.

Mr Phillips: Don't start talking to Karen.

Mr Stockwell: I appreciate that. I guess the problem you have is -- what Gary has requested seems fairly reasonable because --

Mrs Haslam: I'm not saying that he won't get it; I'm just saying that if Mr Carr's suggestion was taken --

Mr Stockwell: Boy, that was a quick explanation. You don't like them that much.

Mrs Haslam: I always know what you're going to say. If Mr Carr's asking for some extra things, I just said, if that's the case, then we'll ask for the same information from the same communities. That's all.

Mr Stockwell: I understood that. I really understood that the first time. As I was going to say, the difficulty you have, I think, in the request being --

Mrs Haslam: I know what my difficulties are.

Mr Stockwell: The request I think that Gary is making is fairly reasonable simply because of the exporting of the cigarettes across the border and then the importing of them back across. If you could just get a handle -- the statement of $4 cheaper per pack -- find out what kind of profit margins you're dealing with, with respect to --

1620

Mrs Haslam: That's not what Mr Carr was saying. Mr Carr was saying he wanted to look at the tax bases in certain states.

Mr Stockwell: Yes.

Mrs Haslam: What you're saying is that you wanted to see the difference between the export tax to border states and the difference in that.

Mr Stockwell: But you didn't let me finish.

Mrs Haslam: Oh, you had more?

Mr Stockwell: Well, I thought I did. Tell me if I did; I'm not sure.

In essence, what it comes down to is what the purchasing power in the States is and how it gets brought back here and what kind of profit margins you're looking at. Even if you did address the tax issue, what would you have to do to address the tax issue? What kind of reductions or competitiveness would you have to make to reach a point where it became no longer viable to bring these smuggleties back in? That was his request. If the social service argument wants to be made, so be it.

Mr Jamison: That assessment is possible there.

Interjections.

The Chair: Order, please. It's hard for the Chair and for Hansard and everyone else to understand what's being said.

Mrs Haslam: Are you leaving now?

The Chair: Ms Haslam.

Mrs Haslam: Yes?

The Chair: Order, please.

Mrs Haslam: Oh.

Mr Jamison: What Mr Stockwell says is probably a valid way to go on that particular issue. Beyond that, I believe we have to take into consideration what the tobacco board also input into this, number one, the difference in export price on tobacco sold, which is approximately a dollar in difference.

The other point that should not be missed when we're evaluating on the basis of what Mr Stockwell would like to see is that it has been made very clear that production units are being set up on this side of the border and that side of the border where there is absolutely no tax being paid whatsoever on product that is being produced and packaged as Canadian tobacco products. To some extent, the liquor board made a similar kind of presentation on the grape juice that became wine on its transportation route in large containers.

Mrs Haslam: It's a miracle.

Mr Jamison: Yes, a miracle; and then packaged up here under traditional labels and so on. Those kinds of things go beyond what you're saying, but also identify in the future what I consider to be major, major problems in this area regardless of what you do in the tax area.

Mr Stockwell: Good point.

The Chair: If I could just make this comment, certainly there are components of the underground economy that include the smuggling or the bringing in of alcohol and tobacco products, but I think we can't forget that in the full-spectrum examination of the underground economy there are many, many facets to it and it's not just those two items, although they are important. There are services and other things.

Mr Jamison: I'm just saying the preliminary report doesn't have anything that reflected that.

The Chair: I'm not saying this to pose it as an argument, Mr Jamison, just the fact that when we examine the underground economy, certainly the alcohol and tobacco issues are important, there's no doubt about that, with regard to tax revenues lost, but I think the underground economy is much more inclusive of other services and commodities than just those two.

Does the research officer have enough information?

Ms Campbell: I have two more questions. There is a large body of literature on the underground economy, and I was wondering if the committee would be agreeable to my limiting the discussion in the paper to what was said to the committee and recorded by Hansard and any references that were made in the briefs that were presented to Hansard.

Mr Stockwell: Yes. Otherwise --

Interjection.

Ms Campbell: My final question is, when would the committee like this paper presented to it?

Mr Jamison: We can be back in a couple of hours.

Ms Campbell: I'll try.

Mr Kwinter: We wanted it yesterday --

Ms Campbell: So you want it today.

Mrs Haslam: I believe in the subcommittee's report two days were given for you. That's what the subcommittee decided, isn't it?

Clerk of the Committee: Two days for you to talk --

Mrs Haslam: Two days for us to talk to you. Oh.

Interjections.

Ms Campbell: Next summer?

The Chair: Certainly we'd like it as soon as possible, but is it unreasonable to expect that you could have something ready for us next Thursday? Is that too soon? We want to be fair.

Ms Campbell: I think it is.

The Chair: It is too soon?

Ms Campbell: Yes.

Mr Stockwell: Do you need more staff?

Mr Jamison: How about Wednesday?

Mrs Haslam: Chris will donate some of his staff to help you, I'm sure.

Interjections.

The Chair: If that's the case, then I understand that, although there have been some negotiations that have concluded with regard to the House leaders trying to determine when we're all going to get out of here for Christmas, there's nothing absolute about the fact that we're going to be here on the 16th, as I understand it. So I think it would probably be wrong for us to suggest that we can meet on that day, because it just may not happen, although we could propose that.

Mr Phillips: I think we probably need a total of two days and maybe another hour, if we can schedule it, in my opinion, in January or February. I think to have a report in our hands by next Thursday and us have time to digest it is unrealistic. Even if you could do it, it would be like Wednesday night.

My recommendation would be to try to schedule one day in January where, after we've had the report for some time, we can come and discuss it and give our input, another day I hope two or three weeks later -- I'm assuming we'll be doing some pre-budget work and we could work it into that -- where we can then give our final comments and then sort of a half day some time another two or three weeks from then when we can finalize it.

I would think if we could plan minimum two days, maximum two and a half days some time in January, February or March and aim to complete the report whenever, February or March, in time to come back with our report, that would be reasonable. Then I think maybe, Paul, what we have to do is get the subcommittee together to see what other business we're going to do and how we can schedule that.

The Chair: Very good proposal, Mr Phillips. I find that quite agreeable.

Mrs Haslam: Would that allow us enough time to hand it over to the ministry for their pre-budget look at it? I think that's also important, that the ministry have it in time --

Clerk of the Committee: Just a minute. What do you mean, hand it over? Do you mean the final, printed, polished, this is the very end, we're going to table our report?

Mrs Haslam: If not, at least a draft then, because if we leave it too late, it won't be available to the ministry in time to be part of its pre-budget consultations or in the ministry looking at a pre-budget time. In that case, then it might not be included in part of what they're doing in the next budget. I feel it's important we give it to the minister and the ministry in time for them to take it into consideration in the budget process.

Mr Carr: Why do a pre-budget in January?

The Chair: It would seem evident from everything I've heard that we would want to deal with this probably in January as opposed to March so that we could --

Clerk of the Committee: You're doing this on the record, so they'll know what the discussions are from Hansard. So there will be that much, and you will each have copies of the drafts.

Mr Phillips: If I might, our pre-budget work traditionally is theoretically designed to give input into the budget. I think we normally complete that mid-March, is my recollection, mid to late March. The budget comes out at the end of April, normally, first of May. So I would think that if we're finished our work by the end of February on this, we're providing that input earlier than we would normally. I guess technically we can send it to the minister without having tabled it in the Legislature.

Clerk of the Committee: Yes. If you wanted to, there's absolutely nothing that says you can't give them a copy of the draft report, the sort of finalized draft report before it's printed and polished and translated and tabled in the House.

Mrs Haslam: Fine. That would be okay with us.

Clerk of the Committee: Whether it's officially or unofficially.

Ms Campbell: Would the committee then like the first draft in the first or second week of January?

The Chair: Sounds very good.

Ms Campbell: Which would it be, the first or the second week?

The Chair: Do you have a preference?

Mrs Haslam: Let's make it the second.

The Chair: Let's do the second, and that gives you a little extra time.

Mrs Haslam: We wouldn't want you to work Christmas Eve and New Year's Eve.

Ms Campbell: I had no intention of doing that.

Clerk of the Committee: We'll just forward it in to your offices then when it's ready?

The Chair: Yes, that sounds like a good idea. If that's all the information you need, then we can consider our directions for a summary or an actual paper with regard to the underground economy to come in the second week in January and look forward to that. We all do.

Before we officially adjourn, I'd like to ask subcommittee members if they could stay just for a few minutes so we can discuss upcoming business the committee will be dealing with.

In that regard, this committee stands adjourned until the next time we meet.

The committee adjourned at 1631.