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Moncton Times & Transcript ~ Tax Help Plus ~ Election & Taxes ~ September 13, 2006 - 17 Sep 2006 by TaxHelp
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Sometimes the voter needs a crystal ball and a dictionary to decipher the campaign pledges. And other times the memory of an elephant and the latest copy of the provincial budget will suffice.
Take for instance the tax pledge undertaken this week by the Conservatives. In an interview with the Times & Transcript’s Daniel McHardie Monday, Premier Bernard Lord is quoted as saying "Just so we are clear a person making $50,000 a year today and $50,000 four years from now will pay eight per cent less in provincial taxes."
To the casual observer, it sounds like there will be an eight per cent tax cut. However, that isn’t the case realistically. Through the boring concept of tax bracket and credit indexation, the same relative dollars will attract a lower net amount of tax.
To better illustrate consider a single person with the normal deductions for Canada Pension and Employment Insurance earning $50,000. In 1999, that person paid $5,286 in income tax to Fredericton. Three years later, the same person paid $4,797 – a savings of almost five hundred bucks. Last year the bill further dropped to $4,710. Make no mistake about it – these are attractive savings.
The province delivered its provincial budget this year on March 28. In it Finance Minister Jeannot Volpe announced a commitment to lower personal income taxes by five per cent. So the new offer is really an increase of three per cent over something the government is already committed to. But even then the Premier’s quote requires closer inspection!
Minister Volpe said “… the provincial income tax credit amounts and tax brackets will continue to be indexed to protect against inflation, …” The inflation factor used in 2006 is 2.2 per cent applied to the 2005 numbers. If one assumes that inflation will continue at two per cent for the next four years, you’d believe that pure arithmetic would take the voter to eight per cent with the budget already presented.
So what does that commitment mean? While no one knows the way the inflation factor is really going to unfold, take the current 2006 figures and factor in an indexation of two per cent until the end of 2009. Then calculate the provincial Basic Personal Amount difference between over the four year period – $666 – and then multiply it by the lowest provincial tax rate – 9.68 per cent. You end up with a tax savings of $65. Then take the difference between the first tax threshold limit over the same period – $2,767 – and then again multiply it by the lowest tax rate and you have additional savings of $268 for a combined total of $333. If we subtract this amount from what the taxpayer remitted in 2005, you’d have a net tax due for 2009 of $4,377.
If we approach the problem from a different perspective and discount last year’s tax bill by eight per cent the amount due in 2009 will be $4,333 – or within fifty bucks – and the reality is that inflation will probably be closer to 2.5 per cent than two in our projections.
Lastly, if we take the $50,000 and plug it into commercial tax software and allow for the standard deductions, it looks like the tax liability is $4,235 in 2009.
In this context the tax commitment appears to be easily achievable. One of the interesting things to point out is that the indexing seems to suggest that a taxpayer continues to get a break as there is an allowance for inflation. But what if the taxpayer experiences a raise equal to the same inflation increasing factors as in our example? The 2005 income increases from $50,000 by 2.2 per cent in 2006 and 2 per cent through 2009. Our model taxpayer is now earning $54,227 in 2009. Interestingly enough, the tax bill increases to $4,861 up from $4,710 in 2005 – even though all we’ve done is increased the brackets, credits and income by the same percentage.
So while the Premier’s statement the other day sounds attractive, it appears to have been a restatement of a commitment earlier made in the legislature. There appears to be no doubt to the validity that a taxpayer earning $50,000 in 2009 will be paying about eight per cent less than one today. But if the taxpayer gets nominal wage increases for inflation and merit, then it appears that there will be very little tax savings, at least as detailed in this case.
Could the Conservatives be more assertive on the tax front? The better question might be “Are these kinds of promises affordable?” You’d think with all these people paying less taxes, the government bank account must be on the ropes. However, when one checks out the budget documents where they publish their numbers, last year’s estimate was $39 million too low from the actual personal income tax collected. And this year they expect to collect almost $45 million more than last year!
Maybe the pledge should be that the government will return to matching the federal numbers. After all, the Premier led virtually all his provincial counterparts on this issue until 2004. It’d be nice to see one set of credit and bracket threshold amounts. On the other hand, it must be tremendously difficult to sit in office and try and balance the needs of society with the demands of the taxpayer. But it might be worth costing out …
Okay, ready? Three guys kick in ten bucks for a $30 hotel room that really is only $25 …
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