Newfoundland and Labrador has substanatially lower income tax rates than the four other eastern provinces. Yet, even though we are encumbered by huge debts, government is reluctant to raise taxes. Why is that?
Is it because our political leaders think tax increases will cost them votes in the next election? Or is government simply predisposed towards the alternative approach - downsizing public institutions through privatization of public assets, more public-private partnerships and more contractual labour?
We believe that privatization, in all its different forms, is not a "solution" we should impose on future generations, especially since that future is looking increasingly precarious. We also believe Newfoundlanders and Labradorians would be willing to pay higher taxes for a limited period of time to get us out of the mess we are in.
Below is our letter to government expressing these points of view.
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To Premier Furey, Minister Coady and the EngageNL Team
An argument for increasing taxation across all tax brackets
There are three approaches government can take to digging our way out of the financial mess we are in. The quick fix is the privatization of government services, more P3s and increased contractual work. This is the preference of the business sector. The second approach, favoured by community action groups, is revenue generation through strengthening local industries and transitioning to a green economy. The problem there is that many of the initiatives suggested require substantial investments from government at a time when government is painfully short of money.
The third route is revenue collection through increased taxation. This letter argues that government should give more thought to this direction. Here are some points to consider.
1. Newfoundlanders and Labradorians are currently paying provincial income tax at lower rates than in the other Atlantic provinces and Quebec.
The following 2020 statistics are based on calculations done through Intuit Turbotax.
Is it because our political leaders think tax increases will cost them votes in the next election? Or is government simply predisposed towards the alternative approach - downsizing public institutions through privatization of public assets, more public-private partnerships and more contractual labour?
We believe that privatization, in all its different forms, is not a "solution" we should impose on future generations, especially since that future is looking increasingly precarious. We also believe Newfoundlanders and Labradorians would be willing to pay higher taxes for a limited period of time to get us out of the mess we are in.
Below is our letter to government expressing these points of view.
--------------------------------------------------------------------------------------------------------------------------------------------------------
To Premier Furey, Minister Coady and the EngageNL Team
An argument for increasing taxation across all tax brackets
There are three approaches government can take to digging our way out of the financial mess we are in. The quick fix is the privatization of government services, more P3s and increased contractual work. This is the preference of the business sector. The second approach, favoured by community action groups, is revenue generation through strengthening local industries and transitioning to a green economy. The problem there is that many of the initiatives suggested require substantial investments from government at a time when government is painfully short of money.
The third route is revenue collection through increased taxation. This letter argues that government should give more thought to this direction. Here are some points to consider.
1. Newfoundlanders and Labradorians are currently paying provincial income tax at lower rates than in the other Atlantic provinces and Quebec.
The following 2020 statistics are based on calculations done through Intuit Turbotax.
Note that, in all but the lowest income category, residents of our province are paying less provincial tax than in other eastern provinces.
Assessment: Given our current fiscal crisis, it is appropriate to raise our personal income tax contributions to rates comparable with those of other Atlantic Canadian provinces.
2. Most of the top 10% of tax payers in this province will continue to pay significantly less tax than in the other four eastern provinces.
The 2021 budget speech “committed to protecting lower income and more vulnerable citizens from shouldering the burden of our financial challenges.” The issue is what tax bracket the government considers to be “lower income”. Here is what government proposed in the 2021 budget speech.
Note that, in all but the lowest income category, residents of our province are paying less provincial tax than in other eastern provinces.
Assessment: Given our current fiscal crisis, it is appropriate to raise our personal income tax contributions to rates comparable with those of other Atlantic Canadian provinces.
2. Most of the top 10% of tax payers in this province will continue to pay significantly less tax than in the other four eastern provinces.
The 2021 budget speech “committed to protecting lower income and more vulnerable citizens from shouldering the burden of our financial challenges.” The issue is what tax bracket the government considers to be “lower income”. Here is what government proposed in the 2021 budget speech.
Note that while there will be tax hikes they only start when incomes reach $135,973 and then by a mere 0.5%. It is not just our vulnerable citizens that will be protected from tax hikes. It’s 95% of the tax filing population.
Note also our lower tax rates for the top 5%. New Brunswickers pay 20.3% on amounts over $160,776. Nova Scotians pay 21% on amounts over $150,000, and Quebeckers a whopping 25.75% rate on any amount over $108,390. Consider also that those provinces are not in crisis.
Assessment: Government’s very modest tax hikes suggest that revenue collection is not a priority in addressing our fiscal crisis. Should that be reconsidered?
3. A flat tax across income brackets, as recommended in the PERT report, is inappropriate.
Government chose correctly not to act on the PERT report’s recommendation that all income tax brackets be increased by a flat rate of one percent. The following example illustrates why this would have been unfair.
After deducting federal and provincial taxes as well as basic cost of living and rent of a one bedroom apartment, a single person (under 60 years of age) living in St John’s and making $30,000 a year would have $81 left over each month for discretionary spending. A one percent tax increase would eat up approximately 16.7% of that amount. By contrast someone making $100,000 would be left with $4,117 to spend monthly, based on the same criteria. A one percent tax increase would represent just 1.8% of a discretionary income 50 times as large.
These differences obviously diminish as one proceeds up the income scale, but they are still there. Increasing tax credits for low-income earners, while a good idea, doesn’t fundamentally alter the biases of a flat tax.
Assessment: We need to think carefully about how to fairly distribute tax increases.
3. What might an incremental increase in taxation look like?
It is important that all of us in this province feel as though we are contributing towards resolving our fiscal crisis. We are in this together. That means introducing a tax increase across all income brackets. However, for low-income earners that can be mitigated by introducing an income tax reduction of $250 on incomes of $30,000 and under, with partial reductions thereafter.
As a base for discussion here is what those tax increases could look like.
Note also our lower tax rates for the top 5%. New Brunswickers pay 20.3% on amounts over $160,776. Nova Scotians pay 21% on amounts over $150,000, and Quebeckers a whopping 25.75% rate on any amount over $108,390. Consider also that those provinces are not in crisis.
Assessment: Government’s very modest tax hikes suggest that revenue collection is not a priority in addressing our fiscal crisis. Should that be reconsidered?
3. A flat tax across income brackets, as recommended in the PERT report, is inappropriate.
Government chose correctly not to act on the PERT report’s recommendation that all income tax brackets be increased by a flat rate of one percent. The following example illustrates why this would have been unfair.
After deducting federal and provincial taxes as well as basic cost of living and rent of a one bedroom apartment, a single person (under 60 years of age) living in St John’s and making $30,000 a year would have $81 left over each month for discretionary spending. A one percent tax increase would eat up approximately 16.7% of that amount. By contrast someone making $100,000 would be left with $4,117 to spend monthly, based on the same criteria. A one percent tax increase would represent just 1.8% of a discretionary income 50 times as large.
These differences obviously diminish as one proceeds up the income scale, but they are still there. Increasing tax credits for low-income earners, while a good idea, doesn’t fundamentally alter the biases of a flat tax.
Assessment: We need to think carefully about how to fairly distribute tax increases.
3. What might an incremental increase in taxation look like?
It is important that all of us in this province feel as though we are contributing towards resolving our fiscal crisis. We are in this together. That means introducing a tax increase across all income brackets. However, for low-income earners that can be mitigated by introducing an income tax reduction of $250 on incomes of $30,000 and under, with partial reductions thereafter.
As a base for discussion here is what those tax increases could look like.
To view how these tax increases would compare with taxation in the other eastern provinces see the appendix.
For those who believe these tax rates are unfairly high for high income brackets, it is worth pointing out that those who invest in the stock market or in property are already being given very generous capital gains deductions. Is this really justifiable given that the evidence shows that these investments are now increasingly being used, not to invest in the real economy, but rather for speculative activities?
Assessment: Government should not be timid about taxing those of us who can afford to contribute more.
4. Does the PERT report suggest a governmental bias towards privatization and/or private sector management of public infrastructure?
Government chose to appoint Dame Moya Greene, with her background in privatization, deregulation and public-private partnerships to lead the Premier’s Economic Recovery Team. This raises the question of whether government was predisposed from the start of the process to give the private sector more ownership or control of assets traditionally in government domain.
The shift in that direction began in 2017 when Government announced plans for the first five public-private partnerships in our province. This was done on the advice of what many consider to be a seriously flawed analysis of their benefits by consulting firm, Ernst and Young. Ernst and Young’s bias was hardly surprising. Private sector advisors simply don’t want to talk about the disadvantages of P3s.
One advantage of tax increases is that they can always be easily and quickly reversed. Privatization and P3s cannot, due to, among other things, restrictive clauses in treaties like CETA. Moreover, while privatization gives government one large bulk payment, probably at fire sale prices, tax hikes continue to provide revenues every year.
Assessment: Tax increases should only be introduced as an alternative to privatization or P3s, not as an add-on to them.
5. The Provincial government should increase the corporate income tax rate by two percentage points for large corporations.
The PERT’s recommendation of an increase of two percentage points is appropriate for large corporations. That includes oil and gas, mining, banking and real estate/leasing, Not only are these corporations highly profitable, but to a large extent their profits leave the province. That is not true of home-grown businesses.
Assessment: Small businesses with incomes up to $500,000 should be exempt from this tax increase.
Conclusions
The legacy of the Conservative government that preceded the election of the Liberals is Muskrat Falls. It is a project that should have been halted in its infancy but wasn’t because government was unable to admit they had made a mistake. Might the legacy of the current government be another long-lasting misjudgment in the form of privatization and more P3s?
Elsewhere governments, have become disappointed with their privatization and P3 experiences and are pulling back. For example, in 2018 the UK government decided to abandon the P3 model altogether, after hearing this conclusion made by the parliamentary committee commissioned to evaluate it. “It is unacceptable that almost 30 years since the first PFI (P3) projects were initiated, the Treasury cannot produce evidence to support its claims that PFI is worthwhile for any reason, apart from the fact that it takes debt off the balance sheet.”
Taking debt off the balance sheet may favour governments seeking re-election, but is it in the long-term public interest? Here in Canada five auditors-general have already made the point that costs under P3s are ultimately often much higher than had the work been contracted out. Should we not take heed in this province and proceed with caution, especially since there are alternative directions we could take?
Taxation is one such direction – a direction that makes sense for another reason. We live in a world of unprecedented and rapid change. Where that change is going to take us is by no means clear. However, it is certainly arguable that government needs more time to assess, adjust and plan for the future. Tax increases are not a “solution” to our problems. But they can be an effective respite measure that will give us the space to think through how we can build a stronger Newfoundland and Labrador.
I’m grateful for the opportunity to put that perspective forward and hope that you will consider it.
Marilyn Reid
Member of Democracy Alert and the Avalon chapter of the Council of Canadians
For those who believe these tax rates are unfairly high for high income brackets, it is worth pointing out that those who invest in the stock market or in property are already being given very generous capital gains deductions. Is this really justifiable given that the evidence shows that these investments are now increasingly being used, not to invest in the real economy, but rather for speculative activities?
Assessment: Government should not be timid about taxing those of us who can afford to contribute more.
4. Does the PERT report suggest a governmental bias towards privatization and/or private sector management of public infrastructure?
Government chose to appoint Dame Moya Greene, with her background in privatization, deregulation and public-private partnerships to lead the Premier’s Economic Recovery Team. This raises the question of whether government was predisposed from the start of the process to give the private sector more ownership or control of assets traditionally in government domain.
The shift in that direction began in 2017 when Government announced plans for the first five public-private partnerships in our province. This was done on the advice of what many consider to be a seriously flawed analysis of their benefits by consulting firm, Ernst and Young. Ernst and Young’s bias was hardly surprising. Private sector advisors simply don’t want to talk about the disadvantages of P3s.
One advantage of tax increases is that they can always be easily and quickly reversed. Privatization and P3s cannot, due to, among other things, restrictive clauses in treaties like CETA. Moreover, while privatization gives government one large bulk payment, probably at fire sale prices, tax hikes continue to provide revenues every year.
Assessment: Tax increases should only be introduced as an alternative to privatization or P3s, not as an add-on to them.
5. The Provincial government should increase the corporate income tax rate by two percentage points for large corporations.
The PERT’s recommendation of an increase of two percentage points is appropriate for large corporations. That includes oil and gas, mining, banking and real estate/leasing, Not only are these corporations highly profitable, but to a large extent their profits leave the province. That is not true of home-grown businesses.
Assessment: Small businesses with incomes up to $500,000 should be exempt from this tax increase.
Conclusions
The legacy of the Conservative government that preceded the election of the Liberals is Muskrat Falls. It is a project that should have been halted in its infancy but wasn’t because government was unable to admit they had made a mistake. Might the legacy of the current government be another long-lasting misjudgment in the form of privatization and more P3s?
Elsewhere governments, have become disappointed with their privatization and P3 experiences and are pulling back. For example, in 2018 the UK government decided to abandon the P3 model altogether, after hearing this conclusion made by the parliamentary committee commissioned to evaluate it. “It is unacceptable that almost 30 years since the first PFI (P3) projects were initiated, the Treasury cannot produce evidence to support its claims that PFI is worthwhile for any reason, apart from the fact that it takes debt off the balance sheet.”
Taking debt off the balance sheet may favour governments seeking re-election, but is it in the long-term public interest? Here in Canada five auditors-general have already made the point that costs under P3s are ultimately often much higher than had the work been contracted out. Should we not take heed in this province and proceed with caution, especially since there are alternative directions we could take?
Taxation is one such direction – a direction that makes sense for another reason. We live in a world of unprecedented and rapid change. Where that change is going to take us is by no means clear. However, it is certainly arguable that government needs more time to assess, adjust and plan for the future. Tax increases are not a “solution” to our problems. But they can be an effective respite measure that will give us the space to think through how we can build a stronger Newfoundland and Labrador.
I’m grateful for the opportunity to put that perspective forward and hope that you will consider it.
Marilyn Reid
Member of Democracy Alert and the Avalon chapter of the Council of Canadians
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