Kenney government fails to restore Alberta’s income tax advantage
In six short years, Alberta has gone from having the lowest top combined federal/provincial or federal/state personal income tax (PIT) rate in Canada or the United States to having one of the highest. The Kenney government can help keep its promise of “restoring the Alberta Advantage”—while also promoting economic growth—by reversing recent provincial PIT hikes.
As recently as 2014, Alberta had a single-rate personal income tax. All income above the provincial personal exemption was taxed at 10 per cent. Once federal taxes were added, Alberta’s top combined PIT rate was 39 per cent—the lowest combined level in Canada and the U. S. This uniquely low top personal income tax rate was an important component of the “Alberta Tax Advantage,” which contributed to economic growth and attracted people and investment to the province.
Since then, much has changed. After taking office, Rachel Notley’s NDP government introduced a five-tier personal income tax system with a top rate of 15 per cent—five percentage points higher than the old top rate.
Shortly thereafter, Justin Trudeau’s federal government created a new top tax bracket that raised the top federal rate from 29 per cent to 33 per cent—a four-percentage point increase. Combined, these two changes meant Alberta’s top PIT rate climbed nine percentage points, to 48 per cent.
Meanwhile, south of the border, PIT rates were going in the opposite direction. The U.S. federal government reduced the top federal PIT rate by 2.6 percentage points to 37 per cent. The cumulative effect of these three developments was the obliteration of Alberta’s income tax advantage. In fact, Alberta went from having the lowest PIT rate to the 10th highest top PIT rate in Canada or the U.S.
Notably, in its recent provincial budget, the Kenney government chose to maintain these uncompetitive income tax rates.
In fact, rather than reducing PIT rates, the Kenney government (in its first budget) introduced a subtle tax increase by at least temporarily pausing the indexation of tax thresholds and various tax credits, which had previously been tied to inflation. This means an individual’s income may reach into a higher tax bracket (and face a higher tax rate) even if there’s no real change in their income or purchasing power. Similarly, they may lose access to certain tax credits despite no real change in their income. It’s a subtle tax increase, but a meaningful one, which will cost Albertans about $300 million per year by the end of the government’s current fiscal plan.
To be sure, the Kenney government has taken important steps to restore tax competitiveness in other policy areas. The decision to gradually reduce the general corporate income tax (CIT) rate in the province from 12 per cent to 8 per cent means Alberta will, once again, have a substantial CIT advantage compared to all other Canadian provinces. A significant body of evidence shows this change will help encourage economic growth and job creation.
This important CIT change, however, should not distract from the fact that this government has not yet taken meaningful steps to restore the “Alberta Advantage” when it comes to taxing the personal income of Albertans.