Window may be opening for tax reform in Quebec

“We want Quebecers to pay less tax and taxes,” said Quebec’s premier Philippe Couillard, in advance of recommendations from a special panel tasked to make the province’s tax system more competitive. The window for change appears to be opening, and the premier’s statement is a positive sign.

Quebec’s economy could sure use the boost. The province underperformed on a host of different measures over the past decade and improving its tax competitiveness—particularly with respect to personal income taxes—is one way to help turn things around. Between now and the 2015 budget, therefore, there’s bound to be considerable debate about taxes in the province.

If Quebecers want a strong economy characterized by increased investment, job creation, and government revenues to fund key services, then the province should move in the direction of lower (and more competitive) tax rates.

Taxes play an important role in our society.  No one disputes that. They’re critical to covering the costs of core government services such as protecting private property, building infrastructure, upholding the legal system, and ensuring a basic social safety net. These types of services protect citizens and help create the conditions for families and communities to flourish.

However, a wealth of economic research shows that high tax rates negatively affect investment, economic growth, employment, and other key economic indicators. This is partly because high marginal tax rates create strong disincentives to work hard, save, invest, and engage in entrepreneurial activities.

And Quebecers are currently paying among the highest personal income tax rates in North America.

For example, Quebecers earning $50,000 face combined federal/provincial marginal tax rates of more than 38 per cent. This is by far the highest rate in Canada. It’s almost 25 per cent higher than the marginal rate paid by neighbouring Ontarians and one third higher than in British Columbia (the lowest-taxed province at this income level). For upper-earning Quebecers the story isn’t much better. Those earning $150,000 or more pay combined marginal tax rates of nearly 50 per cent.

Moreover, the province competes for high-skilled workers, entrepreneurs, and investment dollars with the United States. And Quebec’s personal income tax rates are considerably higher than every U.S. state. Nearby Vermont (one of the highest-taxed states) imposes much lower combined federal/state personal income tax rates at $50,000 and $150,000 (31.8 and 35.8 per cent respectively).

High personal tax rates that are grossly out of step with virtually every Canadian and American jurisdiction don’t help foster a strong and growing economy.

Indeed, high personal income tax rates are one of the factors behind Quebec’s relatively weak economic performance over the past decade. The province’s average annual economic growth was the fourth lowest in Canada and almost one-third lower than the rest of Canada. Its real-per capita GDP—a broad measure of income—was lower than the rest of Canada’s. And Quebec’s average unemployment rate has been higher than all other provinces with the exception of the Maritimes.

Any plan to improve Quebec’s competitiveness and position it for long-term economic growth therefore should involve reforming the province’s personal income tax system and lowering marginal rates.

While Quebecers await the special panel’s recommendations on tax policy, a key question looms. Will Premier Couillard take the necessary steps to position Quebec for future prosperity? The early signs are encouraging. And the research shows that tax reform could provide a real boost for the province.