The CAQ government has a unique opportunity to combine two measures that would help Quebec, namely introducing green taxes to fund public transportation while reducing our taxes.
Posted at 7:00 p.m
For several months, the Legault government has been sticking to the idea of lowering Quebecers’ income taxes. The idea has been criticized given the funding needs of public services, but Quebec is the 3rd of 32 OECD countries with the highest income taxes1.
And whatever we say, the idea of lowering income taxes was proposed by 3 of the 5 main parties in Quebec (CAQ, PLQ, PCQ) which together received 68% of the vote in the October 2022 elections. .
At the same time, the government seems determined to better fund public transport, which has been damaged by the pandemic and teleworking, but this funding would go through… an increase in certain taxes.
In fact, last week Minister Geneviève Guilbault proposed requiring companies to make a “mobility payment” to cover deficits in public transport networks, an amount that would be deducted from companies’ payrolls. In short, it would be a new tax.
The idea has been heavily criticized for two main reasons. On the one hand, Québec is one of the places in the world where payroll taxes are again the highest (4th out of 32 OECD countries)1. This equates to 57% of all taxes paid by businesses in Quebec.
On the other hand, this tax is passed on to employees in particular through lower salary increases2.
In an ideal tax world, economists theorize, Quebec would lower its income taxes but increase its consumption tax (QST) to compensate.
Excise taxes are more efficient and less damaging to the economy. And lower income taxes would boost jobs, which would be a boon in times of labor shortages.
Instead of the payroll tax, Quebec should therefore opt for green taxes, which are similar to consumption taxes. Such taxes would not only result in consumers who emit greenhouse gases being encouraged to change their behaviour, but the revenue generated could also be used to fill the public transport deficit. In these inflationary times, they could also be better received than a VAT increase.
It should be noted that the weight of the eco-tax in Quebec is relatively small compared to the rest of the world (ranked 29th out of 32 OECD countries). These environmental taxes account for 1.2% of GDP here, compared to 3.6% in the Netherlands and 3.2% in Denmark1.
With such a plan, Quebec would kill four birds with one stone: it would recalibrate our taxes, help reduce greenhouse gas emissions, defund public transport financing, and encourage people to work (and reduce labor shortages).
Green taxes take different forms. The gas tax is the best – and simplest – example, but there could also be some of the following taxes: a tax on the purchase of polluting vehicles, a toll on highways, a kilometer tax on transport per heavy truck, a parking tax, a tax on air travel , a tax inversely proportional to city density, a carbon tax like at the federal level (or a reduction in Quebec’s carbon market quotas), etc.
Isn’t that a good offer?
However, the income tax cut proposed by the Caquists could be more targeted, according to a study by University of Sherbrooke 3 economists. They offer two options that would better stimulate labor and further narrow the gap with Ontario, a goal of François Legault.
In Quebec, taxpayers with incomes between $20,000 and $85,000 have the largest tax rate differential compared to Ontario (7.5 percentage point difference). What’s more, the $35,000 to $60,000 have the highest marginal effective tax rates.
During the election campaign, the CAQ proposed reducing the first two tax brackets by one percentage point each. This $1.86 billion tax cut would offer the largest tax breaks to those with incomes of $100,500 and above ($814 per taxpayer).
To further target $20,000-$80,000, the study proposes reducing the 3rd tax bracket by 2 percentage points (instead of just 1) and the threshold above which the 3rd rate would apply to $84,000 ( instead of $98,540).
That way, the biggest beneficiaries of the tax cut would be those with taxable income of $86,000, with a profit of $1,013, while those with $100,000 and over would only get a $413 tax break. The second of their suggestions gives very similar results.
The Legault government has indicated that it intends to fund its tax cut by reducing generation fund payments (and hence debt). According to the study, Quebec must allow 15 years (until 2038) with this tax cut to match the average Canadian provinces’ net debt (29.1% of GDP), compared to 10 years without this tax cut).
On March 31, 2023, Quebec will have net debt of around $199 billion, ranking 3rd among Canadian provinces (after Newfoundland and Labrador and Ontario), which will account for 36% of its GDP.
Value of Hydro Quebec
The study does not mention the market value of Hydro-Quebec, an asset owned by the State of Quebec, which is not comparable in other provinces. Taking this market value into account would reduce our debt ratio by the equivalent of 9 percentage points, which I calculated4 would be below the average for the other federal states today.
My offer, in short: for a tax cut, an increase in environmental taxes and a moderate reduction in our relative debt. Bargain ?