The new federal tax hike on Canada's top 1 per cent has forced New Brunswick to back down on its own tax-the-wealthy approach, raising the possibility that other provinces could follow suit.
This week's provincial budget scaled back the province's tax rate on higher-income earners in direct response to Ottawa's move, reducing the top combined federal and provincial rate to 53.3 per cent from 58.75, which was the highest in the country. Instead, the province raised its Harmonized Sales Tax by two percentage points to 15 per cent.
Both the federal and New Brunswick Liberals campaigned on plans to raise taxes on the top 1 per cent of income earners. The highest combined federal and provincial tax rate is often used for comparing tax competitiveness. New Brunswick's move means the highest combined rate in Canada now belongs to Nova Scotia at 54 per cent.
"We did that to be more competitive," said New Brunswick Finance Minister Roger Melanson in an interview. Even with this week's announcement, the rate in the province will still be higher than it was before the 2014 provincial election.
New Brunswick's move is another example of how Prime Minister Justin Trudeau's income tax plan is not as simple as promised during the federal election campaign. Mr. Trudeau's Liberals promised that a new federal tax rate of 33 per cent on income above $200,000 would generate $3-billion a year in new revenue, which would exactly offset the $3-billion cost of lowering the tax rate on income earned between $45,283 and $90,563 from 22 per cent to 20.5 per cent.
After taking office, Finance Minister Bill Morneau acknowledged the party's calculations were off and the income-tax changes will produce an annual revenue shortfall of at least $1.2-billion.
The Parliamentary Budget Officer has said the gap could be slightly larger.
New Brunswick's debt load is such that even with current low interest rates, the province spends more on interest payments than it does on universities, colleges and financial aid to students.
While the province cut its top income-tax rate, it raised its corporate rate from 12 per cent to 14 per cent. The government also announced spending cuts in the civil service.
The province expects a $347-million deficit for 2016-17 and a return to surplus within four years.
CIBC senior economist Andrew Grantham said that while other provinces may make similar adjustments, New Brunswick's budget brings its top combined rate more in line with other provincial jurisdictions.
The lowest combined rate is in British Columbia at 47.7 per cent: Alberta and Saskatchewan are both at 48 per cent; Newfoundland and Labrador is at 48.3 per cent; Manitoba's rate is at 50.4 per cent; PEI is at 51.37 per cent; Quebec has a rate of 53.31 per cent; and Ontario is at 53.53 per cent.
"It's not like there's one significant outlier, which maybe New Brunswick could have been seen as before," he said.
Nova Scotia Finance Minister Randy Delorey was not available for an interview Wednesday to discuss whether his government is considering a change in light of New Brunswick's move.
"Our top rate only applies to the portion of taxable income above $150,000 and only affects approximately 7,000 Nova Scotian individual tax filers," he said in an e-mailed statement.
A spokesperson for Mr. Delorey said any changes to Nova Scotia's tax system would be introduced as part of the province's spring budget.
Mr. Grantham noted that Britain recently scaled back its top rate after the tax gains proved to be less than expected.
"Once people start paying more tax than they take home, then that could incentivize people to look at areas where they could save," he said.
The federal government has said it will increase tax enforcement, but has not yet announced what form these measures will take.
Mr. Melanson, the New Brunswick minister, said his province's one-year experience with a top rate of 58.75 per cent was too short to produce clear evidence of how high-income earners responded to the higher rate.
"We understand that federally they're making a shift and trying to give relief to the middle class and ask the wealthiest to pay a bit more. I get that. We're also doing the same here in New Brunswick in that the wealthiest will still pay more in New Brunswick than before 2014," he said.
Dan Lauzon, a spokesperson for the federal finance minister, defended Ottawa's tax plans in response to questions about New Brunswick's change. He said the federal government's new tax rate on the wealthiest 1 per cent of Canadians is aimed at creating a "fairer tax system."
Mr. Trudeau recently defended his new top tax rate in one of a series of interviews with Canadians selected by the CBC.
Gary Mauris, president of Dominion Lending Centres, told Mr. Trudeau the tax change means employers such as him are being "taxed to death" and have less money to hire and invest.
"One thing I'd love to see you and see your government be mindful of is those people who make more that $200,000, it isn't the fat-cat bureaucrat that you're thinking is sitting in the corner office. It's small business Canadians that have built these businesses and have grown, have employed people," Mr. Mauris said to Mr. Trudeau in an interview broadcast this week.
The Prime Minister responded that his government will lower the small-business tax rate and will keep corporate taxes low.
"But it's not just about the redistribution. Everyone looks at the redistribution and says, 'Oh, you're taking money from the wealthiest so you can give it to the middle class,'" he said. "But that's only a piece of it and only one way to look at it. The other way of looking at it is this country does well when middle-class people have money in their pockets to spend, to grow, to invest. And putting more money in the pockets of those folks who need it is actually going to have a benefit in terms of your consumers, in terms of the solidity of your work force."