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Prepare for pain as PQ drills for revenue

How bad will it hurt?

The richest Quebeckers feel like they are headed to the dentist's office as they wait to find out how Finance Minister Nicolas Marceau intends to fill the $1-billion hole the Marois government drilled in the province's public finances by scrapping the controversial health tax.

They have reason to fear. The surprise decision to increase, retroactive to Jan. 1, the taxation levels of the highest-income earners has been the talk of the province since the Parti Québécois got elected in September. As is the government's willingness to change – after the fact – the rules of the game for the taxation of capital gains and dividends.

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Faced with the uproar of the business community and the criticisms of fiscal experts, Mr. Marceau has already hinted that he will backtrack during a press conference scheduled for Wednesday afternoon.

He made his about-face clear when he realized that by retroactively making 75 per cent of capital gains taxable, up from 50 per cent, the government would also hit the small apartment building owner or the modest cottage owner who was just unlucky enough to sell his property during the first months of 2012. The PQ government doesn't want to target those middle-class Quebeckers, Mr. Marceau said. Just the poor rich people.

But even if the changes to the capital gains tax and to the dividend tax credit are not made retroactive, the spirit of the Marois government's actions remains the same. Bring relief to the middle class by increasing the burden on the richest Quebeckers.

It could be understandable if Quebec's taxation system wasn't progressive. Or if Quebeckers weren't already the most heavily burdened taxpayers in North America. But unfortunately, they are.

If the minority Marois government has its way, the marginal tax rates in Quebec will cross into the 50 per cent territory when combined with the federal tax rates (52 per cent for those earning more than $130,000, 55 per cent for those earning more than $250,000).

Quebec's elevated tax rates were a badly kept secret. But now, the whole planet knows that la belle province has the highest taxation levels of the continent – and a close to six-percentage-point difference with its nearest neighbour Ontario for the highest-income earners. Hence the reported influx, to the province's tax planners, of clients who are contemplating legal (and maybe not so legal) ways to lessen their tax bill.

In that sense, even if Mr. Marceau does backtrack on the retroactive character of some of the changes he is contemplating, the damage is done.

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Mr. Marceau retorts that you can't blame a politician for keeping its promises. He is absolutely right.

Yet, those promises were initially made in a rosier context. Putting aside the estimated $1.3-billion loss in revenue that closing the Gentilly-2 nuclear plant will incur, a one-time hit, the government will have a very difficult time keeping a lid on the $1.5-billion deficit projected for this fiscal year.

Mr. Marceau announced last Friday that spending overruns totalled $1.1-billion while fiscal revenues are off by $500-million, which means the government needs to find $1.6-billion.

Even if you ignore the theatrics of new finance ministers who enjoy discovering skeletons in their predecessor's closet, Quebec's growth is now anemic.

For the first six months of the year, the economy grew 0.6 per cent, according to the Institut de la Statistique du Québec. That is less than half the 1.5 per cent growth that finance minister Raymond Bachand forecast when writing his 2012-13 budget.

And as inspectors are already working overtime to find tax evaders, you can't realistically expect the hunted-down cheaters to make up the difference.

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Alas, if it were only the elimination of the health tax. But the PQ also promised to reverse the tuition fee hike.

To reverse the indexation of the $7-a-day daycare. And to scrap the progressive hike in electricity rates that was scheduled to take effect in 2014. This rise alone was to bring in $1.6-billion in annual revenues by 2018.

How will a PQ government replace those lost revenues, while never contemplating governmental job cuts, nor steeper deficits? One is almost scared to find out.

The problem is that, in this fantasy world where only Quebec government services appear to be immune to inflation, the PQ made promises the province simply cannot afford.

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