Albertan households are paying hundreds of millions of dollars in additional taxes after a provincial government decision in 2019 to pause the indexation of income tax thresholds to inflation, a new report estimates.
Between 2020 and 2022, Albertans will have paid nearly $650-million in additional provincial taxes owing to that decision, according to a report published on Tuesday by Lindsay Tedds and Gillian Petit, an economics professor and a research associate, respectively, at the University of Calgary’s School of Public Policy. For those affected in the 2022 tax year, the average tax payment would increase by about $150, they estimated.
If incomes are rising at the same pace as inflation, “income tax thresholds must also rise to avoid ‘bracket creep,’” the authors explained. “That is, if the income tax thresholds are not indexed to inflation, an increase in income will result in higher taxes paid by the taxpayer even though their purchasing power has not changed.”
The governing United Conservative Party announced the pause in indexation, which also applies to non-refundable tax credits, in the fall of 2019, a time of deficits for Alberta after a plunge in commodity prices. The move allows the province to collect more revenue as peoples’ incomes rise, potentially pushing them into higher tax brackets or simply increasing their average rate of taxation if they earned more but remained in the same bracket.
Alberta, Nova Scotia and Prince Edward Island are the only provinces that do not automatically raise their personal tax brackets to account for inflation. Consumer prices are currently growing at the highest rates in nearly four decades. While wages have not been keeping pace with inflation, they have been accelerating of late.
“De-indexation is taxation by stealth. It is really bad policy, more so in times of inflation like today,” Dr. Tedds wrote on Twitter on Tuesday. “De-indexation fills government coffers while eroding the ability of households to maintain their purchasing power.”
Alberta has experienced a dramatic turnaround in its public finances. Thanks largely to the surge in energy prices, the province posted a $3.9-billion surplus in the 2021-22 fiscal year, wildly different from an initial projection of an $18.2-billion deficit. The provincial government has said it would review its tax system – and potentially resume indexation – once its finances have stabilized, although it hasn’t announced anything to date.
Premier Jason Kenney said in May that he plans to step down, and the UCP will elect a new leader on Oct. 6. The next provincial election will be held in May, 2023.
“At the moment, we are focused on building and maintaining a stable fiscal framework for the province now and into the future by prioritizing debt repayment and growing the Alberta Heritage Savings Trust Fund,” Finance Minister Jason Nixon said in a statement, referring to the fund that saves a portion of the province’s resource royalties.
If indexation does not resume in 2023, Albertans would pay between $570-million and $706-million more in provincial taxes for that year, assuming an indexation rate of 3 per cent or 5 per cent, which Dr. Tedds and Dr. Petit describe as “both plausible rates given current inflation.” The national inflation rate hit 7.7 per cent in May.
Under the 5-per-cent scenario, the cumulative impact of bracket creep would amount to $1.35-billion in additional taxes paid over four tax years. Those affected “will also be dealing with significant increases in the cost of living,” the authors wrote.
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