Bring back pre-2009 tax rates: NB economists

Minister of Finance Blaine Higgs’ recent announcement that the provincial fiscal deficit will be about $356 million – twice as high as anticipated in his budget – sparked considerable comment. However, the effects of the reductions in personal income tax rates that were phased in between 2009 and 2011 have been largely ignored, although they put a large hole in the province’s finances.

If 2008 tax rates had been restored this year, the province would have had about $230 million in extra revenues, nearly two-thirds of the estimated deficit. If the rate reductions continue for one more year, the larger deficits they produce will have added almost a billion dollars to the province’s debt.

These tax reductions, initiated by the Graham government and financed with borrowed money, were directed at taxpayers with relatively high incomes, the people who surely needed the tax reduction the least. Ninety percent of the reductions went to the top half of taxpayers; the top 10 per cent got 50 per cent of the tax reductions. About 1,700 taxpayers, all with taxable incomes over $250,000 a year, got 9 per cent, some $20 million a year.

In 2008, a group of economists signed an open letter to Premier Shawn Graham and Finance Minister Victor Boudreau. It called on them to provide a proper analysis of how the (then proposed) tax changes would affect provincial revenues and the distribution of income and to indicate “how the government proposes to deal with revenue shortfalls.” They failed to do so.

Economists were well aware at the time of the regressive nature of the tax proposals and how they would worsen the state of the province’s finances. In a study of the income tax reductions published in January 2011, economists Joe Ruggeri of the University of New Brunswick and Jean-Philippe Bourgeois of Dalhousie University argued that the income tax reductions were “unsustainable, regressive and ineffective.”

It is hardly surprising that, today, the Liberals say nothing about the role their income tax reductions have played in the current deficit. The Conservatives are similarly silent because they failed to oppose them while in opposition. Once in government, they only stopped some of the remaining reductions from being phased in.

Some commentators have advocated an increase in the Harmonized Sales Tax (HST) to address the fiscal shortfall. In fact, this was part of the Graham government’s initial tax reform proposal. To implement it now, while leaving the income tax changes in place would be inequitable. It would virtually complete the original plan of shifting taxes from income to consumption and thus from relatively high-income people to those with middle and low incomes. The best place to begin addressing the provincial deficit, while at the same time improving the equity of the tax system, is to restore 2008 income tax rates.

An Environics poll last year found that three-quarters of Canadians agreed that taxes are “mostly a positive thing because they are how we pay for important things that make our quality of life good, such as health care, education and roads.” New Brunswickers likely share this view; there seems to be little enthusiasm for deep cuts in public services.

The New Brunswick Common Front for Social Justice, for example, has proposed returning to 2008 tax rates while also advocating a new top tax bracket to raise a modest amount of additional revenues from very high income recipients. Proposals such as this deserve widespread support. In the absence of political leadership, citizens’ groups must take the initiative to correct the mistakes of the past by advocating equitable ways of getting our finances in order.

Signatories: Pierre-Marcel Desjardins, PhD, Université de Moncton; Michel Deslierres, PhD, Université de Moncton; Roderick Hill, PhD, UNB Saint John; Mustapha Ibn Boamah, PhD, UNB Saint John; Stephen Law, PhD, Mt. Allison University; Professor Ronald C. Leblanc, Université de Moncton; André Leclerc, PhD, Université de Moncton, Edmundston; Ted McDonald, PhD, UNB Fredericton; Joan McFarland, PhD, St. Thomas University; Robert Moir, PhD, UNB Saint John; Anthony Myatt, PhD, UNB Fredericton; Andrew Secord, PhD, St. Thomas University; and Weiqiu Yu, PhD, UNB Fredericton.