When BDO’s Eastern Canada Tax Service Leader, Greg London, looked over Newfoundland and Labrador’s provincial budget, the first thing he noticed was the tax changes didn’t match with the recent recommendations from Dame Moya Greene and the Premier’s Economic Recovery Team (PERT).

The PERT’s plan for provincial recovery included a 1% increase across the board on personal income taxes (the team said it could bring in a range from $94.1 million in the next fiscal year in 2022-23, through to an estimated $68.8 million as of 2026-27, based on an expected drop in filers). Finance Minister Siobhan Coady opted for a more targeted increase this year, on only higher-income earners.

In a similar vein, a 2% increase in corporate income tax, a 0.5% increase in payroll tax, and a possible hike in HST, all recommended by the PERT weren’t declared in this year’s budget, though Coady said a change in the provincial portion of the HST is being considered.

At Confederation Building, London asked the minister why she and the government decided on the less-aggressive approach right now.

“She said, ‘Greg, we’re still in pandemic time.’ And she said the people that are still at the bottom (taxable income) rates are still suffering,” he told Atlantic Business Magazine.

 

Greg London

The province is celebrating improved numbers on total COVID-19 vaccinations delivered. However, while restrictions have eased, variants did lead to tighter public health restrictions and shutdowns for businesses in different parts of the province in the days heading into the budget’s release. Uncertainty on immediate, pandemic-related pressures was also greater even at the point the budget was being put to bed before printing. But the province’s financial needs aren’t on pause.

“It almost felt like they had to do something. They chose the group that are still doing ok in pandemic time. That’s what I took out of it,” London said.

The addition of new brackets for people making more than $250,000, paired with the targeted tax hike, is expected to bring in about $15.3-million more in revenue this year. It’s something, though still a paltry sum when set against spending and the debt burden.

While raising income taxes on the higher brackets, Coady told reporters she wanted Newfoundland and Labrador to remain in line with the other Atlantic Provinces. By departmental figures, Newfoundlanders and Labradorians are still well below the income tax rates in neighbouring Nova Scotia, when looking at taxation on annual incomes up to half a million dollars.

(Source: Newfoundland and Labrador Department of Finance; Actual values from a departmental comparison of income tax rates, calculated using a non-complex return, being a single taxpayer with employment income only, claiming the basic personal amount, and credits for CPP and EI.)

The advice on personal income tax

In Newfoundland and Labrador, a relatively small number of tax filers contribute the personal income tax wedge of the government’s revenue pie. Yet, it’s the largest contribution to current government revenues by category (with personal income tax accounting for just under 23% of total provincial government revenues this fiscal year).

There have been multiple studies and reviews in the past five years alone looking at taxation and offering detailed recommendations for changes, outside of any contributions direct to government by individual economists and financial institutions. In 2017, for example, the Liberals struck an independent tax review committee. Reporting back in late 2018, it advised careful stepping on both personal and corporate tax changes.

“Opportunities for new taxes are limited,” the final committee report stated, referring to the small number of taxpayers and existing income tax system as “progressive and fair.”

It stated about 51% of income tax filers in the province in 2016 had taxable incomes of $30,000 or less, paying about 3.9% of the personal income tax pot, while at the other end of the spectrum less than 7% of filers had a taxable income greater than $100,000 and were paying over 35% of the personal income tax collected. There was more, but ultimately it came as no surprise when, earlier this year, Dame Moya Greene and the PERT described roughly the same landscape.

As of 2018, the PERT report stated, less than 7% of tax filers had a taxable income of more than $100,000 – a figure comparable to 2016 – and they now paid over 40% of all personal income tax collected by the province. The same year, about 36% of tax filers paid no provincial income tax.

“This indicates a high number of people are paying a high proportion of personal income taxes in the province,” the PERT stated.

Income taxes are meant to be progressive. It’s standard for higher income brackets to pay more than people in lower income brackets. The real question for Newfoundland and Labrador is, when you want to raise taxes to take in more revenue, because you have immediate cash needs and your province’s income taxes are across-the-board lower than they were nearly 20 years ago, what is a fair split of that new tax burden? And how far can you raise taxes without driving people away?

The grassroots “People’s Recovery N.L.” (including input from individuals and a variety of community organizations, unions and associations, not all detailed on their site) also issued a set of recommendations on the provincial tax system ahead of the latest budget.

They highlighted income inequality in the province and stated taxation on higher-income individuals is “relatively low.” They pointed out the threshold for hitting the top personal income tax rates was higher in Newfoundland and Labrador than in Nova Scotia, calling it a “sweet deal” for people with higher incomes in Newfoundland and Labrador. They recommended increasing the rate for the top brackets by 2% (being, they said, anything above $135,432). Among other things, they also recommended a new tax bracket for anyone making $1 million or more.

Government of Newfoundland and Labrador 2021 income tax changes

More to come

Coady and the Liberals have stepped carefully this year. They did hike higher-income earners, and the province now has a bracket for personal income tax on people earning more than $1 million (at 21.8%, being a step up from the 21.3% for anyone now a step below, making $500,000 to $1 million).

“Our personal income taxes, even with these changes, we’re still very competitive with Atlantic Canada,” she stated.

We are also still in need of both reductions in provincial spending and an increase in revenues.

“Income taxes are never going to be popular,” London said, explaining why he agreed with the PERT report and the suggestion of a 1% increase from 2020-21 rates for all brackets.

“It’s going to take everybody in Newfoundland and Labrador to bring us into the next, say, five years and the prediction on an actual balanced budget,” he said.

“We probably need a tax hike across all the rates, and a small one like the 1% – that won’t drive people out of the province but will drive more revenue,” he said.

In looking to the future, London said it will be increasingly important to have Newfoundland and Labrador’s aging demographic in mind, in addition to thinking about what rates might drive needed professionals out of province. With the oldest population in Canada, a wave of retirees can affect the overall number of higher-income earners relied on when it comes to personal income tax revenues, and by extension reduce total revenues, without the tax rate itself necessarily driving them away or being the whole explanation for change over time.

London said tax increases are really a short-term solution for addressing deficits and debt in particular and Atlantic Canada, as a whole, needs to do more to “get the budgets right” and make the tough choices on spending.

As for predictions, apart from some tax increases he sees on the horizon for next budget for Newfoundland and Labrador, London said all Atlantic Canadians should be expecting to see more in the way of wealth tax, targeting luxury goods and items of inheritance.

“I think it’s a matter of time before all of Canada goes there,” he said. •