When Quebec Premier Philippe Couillard unveiled a mid-mandate cabinet shuffle in January, he promised the "rough seas" of deficit reduction would give way to "calmer waters" as his Liberal government reached its top goal of a balanced budget by the end of the current fiscal year.
Balancing the books comes none too soon for Quebec taxpayers, who have watched successive governments postpone tax relief in the name of fiscal probity and social solidarity. The result is that, at slightly more than $26,000 in 2014, Quebec was dead last among the provinces in per capita disposable income – a precipitous drop from fourth place only a decade earlier.
The toxic combination of weak economic growth and higher income taxes means that Quebeckers, on average, saw their after-tax income increase more slowly than their counterparts in every other province except Ontario in the decade to 2013, according to a Montreal Economic Institute study.
Could the end of that sorry stretch be in sight?
As Mr. Couillard's government prepares to table its 2016-17 budget next week, all eyes are on whether Finance Minister Carlos Leitao will finally deliver on a long-promised reform of the provincial tax system. Mr. Leitao has already vowed to gradually eliminate the hated Quebec health tax, which ranges from $100 to $1,000 depending on income, starting in 2017. But economists and business groups are calling on Mr. Leitão to perform far more invasive surgery on the tax Leviathan.
Quebec's current emphasis on high personal income taxes and payroll taxes is a drag on growth and employment that reduces the incentive to work. Mr. Leitao has admitted as much, warmly welcoming the recommendations of the Quebec Taxation Review Committee's final report last year. The committee led by University of Sherbrooke tax professor Luc Godbout called for $5.9-billion in income and payroll tax cuts, a sum that would be entirely offset by increases in consumption taxes and fees and by eliminating tax expenditures, such as the refundable tax credits for large corporations.
Mr. Leitao's initial enthusiasm for the Godbout report has been tempered somewhat by opposition to an increase in the Quebec sales tax from retailers and small businesses and the desire of big businesses to hang on to their refundable tax credits. Quebec already has the highest sales tax in Canada after Nova Scotia. The Quebec Sales Tax and federal GST total a combined 14.975 per cent. The Godbout report recommended increasing the combined rate to 16 per cent, raising fears of a rush to online shopping on non-Quebec sites that don't levy the provincial sales tax.
Still, something has to give. While Quebeckers' attachment to more expansive social programs and the province's bloated debt means the Couillard government has a limited ability to reduce its overall tax take in the short-term, cutting the personal tax burden should be Mr. Leitao's top priority.
Cutting taxes became a bit more complicated when, in December, the government agreed to raises for 400,000 public sector workers over five years that were much more generous than then Treasury Board president Martin Coiteux vowed he would give when he began negotiations with the unions.
But the move by the new Liberal government in Ottawa to raise income taxes on Canadians earning more than $200,000 a year could force Mr. Leitao to act sooner rather than later on income tax relief.
With Ottawa's move, the top combined marginal income tax rate in Quebec jumped to 53.3 per cent, above the 50 per cent threshold the Godbout report warned could lead to diminishing returns. While Ontario and Quebec now have comparable top marginal rates, Quebec's top provincial rate kicks in at a much lower level – barely $140,000, compared with $220,000 in Ontario.
That means a Quebec household earning $150,000 pays about $7,500 more in income taxes than an Ontario counterpart making the same amount. That sum does not include higher sales and property taxes in Quebec. Quebeckers do pay far lower daycare fees – even after the Couillard government introduced a sliding fee scale based on income last year. Though, on an after-tax basis, the daycare differential is cut substantially by Ontarians' greater ability to deduct fees on their taxes.
The Godbout report found that, over all, taxes amounted to 36.6 per cent of Quebec's gross domestic product in 2012, compared with 29.3 per cent in the rest of Canada. Quebec not only beat out the average for the G7 nations, but for all the countries belonging to the Organization for Economic Cooperation and Development.
Cutting taxes is one way to reduce the tax-to-GDP ratio. Growing the economy is another. Mr. Leitao can start with the former, hoping it leads to the latter. He can't do any worse than his predecessors.
Konrad Yakabuski