In the past two tax years, Quebec and Ottawa have benefited financially from inflation while largely underindexing their personal income tax systems.
As a result, taxpayers have to pay relatively more taxes than they would normally have paid if the tax schedules had been adjusted for inflation.
I estimate the amount of excess taxes that Quebec taxpayers will pay into the coffers of the two tiers of government for the 2021 and 2022 tax years at US$4.6 billion, which is US$2.8 billion in Quebec and an amount of $1.8 billion at the Quebec federal level.
Indexing too low
The purpose of indexing the tax tables is to protect taxpayers’ “purchasing power” in the face of inflation. In theory, indexing tax tables allows taxpayers to pay their fair share of taxes given the loss of purchasing power.
Governments index the tax tables for each tax year according to a formula based on the change in the consumer price index calculated during the 12-month period from September 30th to the next.
However, based on September 30, this formula resulted in significantly lower fluctuations than the fluctuations in the consumer price index in the 12 months (December to December) of the financial year.
Let’s look at the Quebec government. In 2021, the provincial tax tables were indexed at a rate of 1.26%. I remind you which rate is based on the change in the consumer price index from September 30, 2019 to September 30, 2020.
This indexation rate of 1.26% is close to the real rate of inflation for fiscal year 2021, ie a rate of 5.1% for the 12-month period from December 2020 to December 2021. .
By under-indexing fiscal 2021 tax brackets, Quebec has siphoned us $1.3 billion in excess tax.
On the federal side, the indexation of the 2021 tax panels was just under 1.0%. I reckon that with this underindexing, the Trudeau administration took about $1 billion from us in excessive federal taxes.
Incidentally, my calculations are based on the “Impact of Indexation for the Government” which Quebec evaluates year by year in the “Parameters of the Income Tax System”.
For the current fiscal year, i.e. 2022, Finance Minister Eric Girard has indexed the provincial tax tables to 2.64%. For her part, Federal Finance Minister Chrystia Freeland granted a slightly lower indexation of even 2.4%.
Compared to year-to-date inflation, these indexing rates for the current fiscal year tax tables are really low.
If inflation continues to develop, it can be expected that the consumer price index will rise by more than 7% in this 2022 financial year.
Given the large gap between tax table indexation and inflationary reality, nearly $1.5 billion in excess provincial taxes and about $739 million in excess federal taxes will be siphoned off for Quebec taxpayers in 2022.
I believe that the governments of François Legault and Justin Trudeau should revise the planned indexation rates upwards (2.64% and 2.4%) to bring them as close as possible to reality, ie inflation of at least 7% in 2022 possible to bring.
However, the future indexation of the 2023 tax panels (based on the change in the consumer price index from 09/30/2021 to 09/30/2022) is likely to be well above the actual inflation level in 2023.
The problem? It is not in 2023 that taxpayers will have to reclaim part of their overpaid taxes in 2021 and 2022.
It is now that inflation is galloping at an annualized rate of 8% for now.