April 10, 2013 – The hoped-for revenues from personal and corporate income tax hikes proposed in British Columbia’s 2013 Budget will be undermined by taxpayers’ reaction to the hikes, according to a report released today by the C.D. Howe Institute. In “A Reality Check for BC: The Impact of Behavioural Responses on the 2013 Budget’s Proposed Income Tax Increases,” author Alexandre Laurin examines likely individual and corporate responses to the tax hikes, such as economically damaging reduced work effort and investment.
After taking these into account, Laurin finds revenues are unlikely to meet budget projections. “In the near term, personal tax revenues could fall short of expectations by as much as 40 percent. In the long term, BC’s corporate income tax revenues may fall below the level they would have been without the tax increases,” said Laurin.
The BC budget’s deficit elimination plan includes a proposed temporary 2.1 percentage point tax-rate increase on individual taxpayers earning more than $150,000, and a permanent 1 percentage point hike in the corporate income tax rate. “Both rate hikes will impede the economic growth that BC is counting on to balance its budget. This, in turn, may end up pressuring the government to extend its proposed “temporary” PIT hike for a longer time, to cover the shortfall,” he added.
BC’s new tax bracket for high-income earners is part of a provincial trend that has seen tax increases implemented or proposed in Nova Scotia, Ontario, Quebec, and New Brunswick, noted Laurin. Governments, as a matter of course, should disclose the extent to which their estimates for tax revenues after policy changes incorporate potential behavioural responses – if any, concludes Laurin.
Less economically damaging tax reforms – such as the recently rejected Harmonized Sales Tax (HST), progressive property taxation, carbon tax increases, or fewer tax expenditures – could be have been considered instead, Laurin said.
Click here for the full report.
For more information contact: Alexandre Laurin, Associate Director of Research, or Daniel Schwanen, Assistant Vice President, Research, C.D. Howe Institute. (416) 865-1904 email: cdhowe@cdhowe.org