Personal Taxes

UCP raises personal earnings tax by $286 million in 2022

In a press conference on March 7, 2019, Jason Kenney, then leader of Alberta’s official opposition, told journalists that they would not lower personal income taxes if his party were elected in the upcoming election:

We currently have no fiscal space to lower income tax rates and would defer doing so until the budget is balanced. We would then appoint a body to advise the government on tax reform to get the best bang for the buck in terms of jobs and growth through tax policy. So I don’t think that’s going to happen in the first term of our government. Our platform would be based on the abolition of the carbon tax, [as well as] the tax cut to create jobs for employers, however no changes to the current income tax system.

Almost 8 months later, the UCP published its first budget. In it we saw – well – changes to the income tax system.

In fact, there were 4 specific changes that directly impacted how much Alberta taxpayers would pay in income tax:

  1. Stop indexing non-recoverable tax credits to inflation
  2. Stop indexing tax bracket thresholds for inflation
  3. Cancel the Tuition Reduction
  4. cancel the education tax credit

In 2001, the Ralph Klein administration indexed the basic and spousal personal income tax credits to inflation. It has stayed there ever since. At least until 2019.

This is how the exceptions work.

Anyone who earns less than the basic allowance does not have to pay income tax. Anyone who earns less than the spouse’s allowance can have their income reduced by up to this amount.

However, it does not only apply to those who earn less than these amounts. Anyone can claim these amounts, but for those who earn above it, it basically reduces the amount of tax you owe by reducing the amount you claim as income.

In 2018, the Alberta allowance was $18,915 each for the base amount and the spouse amount. That meant everyone who filed taxes that year had their income reduced by $18,915, effectively reducing the personal income tax they owed. And if they were married, the total allowance was $37,830.

A year earlier, those numbers were $18,690 for one and $37,380 for both. It increased every year. Because it was indexed to inflation.

For UCP’s first budget, it rose to $19,369 for one and $38,738 for both, a 2.4% increase by how much Alberta’s CPI rose. And their plan is to keep them there until “the economic and fiscal situation can support it.”

And as we can see in both the 2020-2021 budget and the 2021-2022 budget, they kept their word. Here are the tax credits (personal and spousal exemptions are the first two lines):

And here are the tax brackets, also frozen:

In its first budget, the UCP projected an increase in Alberta’s CPI of 1.7% in 2019, 1.8% in 2020, 1.9% in 2021, 2.0% in 2022 and 2.0% in 2023.

If the UCP had kept the exceptions indexed to the CPI, they would have risen to $19,698 in 2019, $20,053 in 2020, $20,434 in 2021, $20,843 in 2022 and $21,259 in 2023. Double this amount for both allowances.

Assuming the UCP government doesn’t reindex exemptions from CPI before 2023 – and they didn’t for the first two years – that means taxpayers pay increasing amounts in income tax every year.

  • 2019: $33 more income tax
  • 2020: $68 more income tax
  • 2021: $107 more income tax
  • 2022: $147 more income tax
  • 2023: $189 more income tax

Of course you double this amount if you claim the spouse amount in your personal income tax return. Taxpayers may have to pay up to $378 more in income taxes by 2023.

And those are just the exception amounts, but it’s the same with the tax brackets.

In Alberta we had 5 tax brackets in 2019:

income tax rate
Up to $131,220 10%
$131,220.01 to $157,464 12%
$157,464.01 to $209,952 13%
$209,952.01 to $314,928 14%
$314,928.01 and up fifteen%

Each year the threshold for each class has been increased to reflect increases in inflation.

For example, the threshold for the lowest tax bracket increased from $128,145 in 2018 to $131,220 in 2019, a 2.4% increase, as did the CPI for that year.

That means anyone who earned $128,145 or less in 2018 only paid 10% income tax, and anyone earning above that only paid 10% on the amount under $128,145.

The 2019 change meant that the 10% rate now applied to anything under $131,220, not just $128,145.

And if the UCP hadn’t changed things, that threshold would keep rising, meaning people would stay in the lower tax bracket for longer.

But the threshold remains, so people are more likely to move into higher tax brackets when they receive pay increases, resulting in higher tax liabilities for those who do.

The UCP estimated that suspending indexation for both tax allowances and tax bracket thresholds would reduce “tax spending” by over $600 million by the end of fiscal year 2022-23.

And cutting spending by $600 million sounds like a good thing. Except that this is a sleight of hand. That’s not the amount by which they will reduce spending; that’s how much more taxpayers will pay in personal income tax.

  • 2019-20: $20 million more income tax
  • 2020-21: $98 million more income tax
  • 2021–22: $196 million more income tax
  • 2022–23: $286 million more income tax

Since 93.3% of personal income tax is earned on income in the first tax bracket, high incomes will not bear the brunt of these increases.

Keep in mind that these numbers are based on the CPI forecast from the 2019-2020 budget. With the changes in the economy in 2020, these numbers could be higher or lower depending on how the CPI performs.

For example, a report by ATB Economics last October estimated Alberta’s inflation rate at 1.7% in 2019 and 1.1% in 2020. The 2019 forecast in the first budget was spot on at 1.7%, but they were slightly off 2020, which they predicted would be 1.8%.

A report last month put inflation at 3.2% for 2021, significantly higher than the 1.9% originally forecast for this year.

If this continues, we may end up paying more than $286 million in income taxes than originally projected.

Of course, this does not even include the study and training tax credits. These credits reduced the amount of income tax owed by post-secondary students.

With their cancellation, these students collectively pay more in personal income taxes:

  • 2019-20: $20 million more income tax
  • 2020-21: $90 million more income tax
  • 2021-22: $115 million more income tax

So much for No changes to the current income tax system.

Speaking of no longer indexing to inflation, these changes do not include the de-indexing of several other programs:

  • aish
  • Alberta seniors benefit
  • Special Needs Assistance
  • Additional accommodation service
  • Senior Lodge Help

Since AISH funding would effectively be frozen and not increased to match inflation, this would — to use the words of the 2019-2020 budget — “reduce costs by $10 million” in the first year. In other words, they would spend $10 million less on AISH than planned in their first fiscal year. Effectively reduced AISH by $10 million.

Pausing inflation indexing on the four senior programs listed above would “reduce costs by $55 million over four years.” In fact, the UCP would cut spending on these programs by an average of nearly $14 million per year.

If we ever get to the point where “the economic and fiscal situation can support this”, I wonder if the UCP will recoup the lost indexed amounts or if they will just start from where they are.

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