The failure to index tax brackets is unjust and threatens Nova Scotia’s growth
Posted September 22, 2023
The Houston government has been unrestrained in its spending. Nova Scotians will therefore have found it surprising that the province nevertheless showed an unexpected surplus in the fiscal year ending last March.
On health care the government has been dishing out money as fast as it can. But almost every department was substantially over budget. The spending in excess of budget by departments other than health was more than a billion dollars. Including health, the excess was $1.29 billion.
Not to worry? Total revenue for the year was $1.95 billion, or 14.3 per cent, higher than the budget, and $1.54 billion or 11.0 per cent higher than the prior year. Provincial income tax alone contributed $1.26 billion above budget. Provincial sales taxes were $360 million more than planned.
How is it possible for the budget revenue estimates to be so wrong? Start with immigration. The government has consistently underestimated population growth by a wide margin. The 2022-2023 budget estimated a population number for 2030 that will be passed next year.
Second, inflation, which used to rattle around 2%, spiked to 6.8% in 2022. That meant higher paycheques and bigger sales tax proceeds.
Thirdly, in Nova Scotia that inflation hits Nova Scotia taxpayers harder than others.
To illustrate, we will look at 3 different hypothetical working age taxpayers. Alice lives alone and struggles to get by on $30,000 per year. Bob is the sole wage earner in his family of four with a five-year-old and a teenager. Carol is the sole breadwinner in her similar family of four.
The table below shows the federal income tax for each, and what their 2023 provincial income tax will be if they are in Nova Scotia, Ontario, and British Columbia.
|Federal Income Tax||$165||$7,076||$26,205|
|British Columbia Difference||$733||$4037||$8,268|
The figures are cause for considerable concern. Population growth has been the best thing that has happened to Nova Scotia in decades. It has enabled big investments in infrastructure and health care. It has made our population younger and more vibrant. It has benefitted all parts of the province.
These tax differences put that growth at risk. Ontario has been the main source of net interprovincial migration to Nova Scotia. British Columbia is second. Yes, the high cost of housing in Halifax is still lower than Vancouver or Toronto, but these tax differences will cause people to think twice, and may cause some Nova Scotians to think about going the other way.
How are we going to attract the much needed workers in health care and construction trades? International migrants who bother to do these calculations might reconsider their choice of province.
As things stand this is a big concern. It is programmed to get worse and worse every year. Indexing of tax brackets in Ontario and British Columbia means that taxes grow roughly at the same pace as income. Prince Edward Island, the other exception until recently, has introduced indexing for 2023.
Nova Scotia has not. Imagine that Carol was earning $140,000 in 2022. Noting the 6.8% inflation, her employer raised her pay to $150,000 at the beginning of 2023. Her pay went up by 7.1%, but her taxes in 2023 will go up by 9.1%.
Carol is lucky compared to Bob. His employer increased his pay of $65,000 by 7.6% at the beginning of 2023. His 2023 taxes will be 14% higher than 2022.
Worse off of all is Alice. Her 7.1% pay increase from $28,000 in 2022 to $30,000 in 2023 will result in a 14.4% increase in taxes, leaving her to struggle from even further behind. The problem for her and everyone else is that the injustice will continue to grow every year that tax brackets are not indexed.
The government was asked if they did any calculations to see the impact on tax revenue of indexing for tax brackets. In reply they said:
“The cost of indexing the province’s personal income tax brackets and non-refundable block of credits is approximately $123 million for the 2023 taxation year. Indexing compounds over time. So, for 2024, the cost of indexing will be approximately $25 million per 1 percent of inflation, on top of the indexation amount from 2023. Government’s priority is to fix healthcare and we are making significant investments in this area. However, in preparing a budget, government continues to evaluate all possibilities.”
Spending on health care as fast as possible was not a bad choice for the past 18 months. That time is over. The Houston government’s next budget must exercise much greater discipline in spending on all fronts. They must join the rest of Canada by indexing tax brackets, and undo some of the damage to our competitiveness by past decisions not to index.
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