My offer: less taxes, more environmental taxes

The CAQ government has a golden opportunity to combine two measures that would help Quebec, namely introducing eco-taxes to finance public transport while lowering our taxes.

For several months, the Legault government has been firm in the idea of ​​reducing Quebecers’ income taxes. The idea is criticized, given the funding needs of public services, but Quebec is the 3^e out of 32 OECD states which has the highest income taxes^⁠1.

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 obtained 68% of the vote in the October 2022 elections. .

At the same time, the government seems determined to better fund public transit, which has been damaged by the pandemic and teleworking, but this funding would go through… an increase in certain taxes.

Last week, in fact, Minister Geneviève Guilbault suggested requiring companies to pay a “mobility payment” to make up for the deficits of public transport networks, an amount that would be deducted according to the payroll of companies. In short, it would be a new tax.

The idea is strongly criticized for two reasons, essentially. On the one hand, Quebec is one of the places in the world where, once again, the payroll tax is the highest (4^e out of 32 OECD states)^⁠1. It corresponds to 57% of the total taxes paid in Quebec by businesses.

On the other hand, this tax ends up being passed on to employees, in particular through lower salary increases.^⁠2.

In an ideal fiscal world, economists suggest, Quebec would lower its income taxes, but raise its consumption tax (QST) to compensate.

Consumption taxes are more efficient and less damaging to the economy. And lower income taxes would stimulate work, which would be a blessing in this time of labor shortage.

Instead of the payroll tax, Quebec should therefore opt for eco-taxes, which are similar to consumption taxes. Not only would such taxes have the effect of encouraging GHG-emitting consumers to change their behavior, but the revenue generated could be used to fill the public transport deficit. In these inflationary times, they might also be better received than a sales tax hike.

The weight of eco-taxation, it should be noted, is relatively small in Quebec compared to the rest of the world (29^e out of 32 OECD states). Such environmental taxes represent 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 GHGs, solve the financing of public transport and encourage people to work (and reduce the labor shortage) .

Ecotaxation takes various forms. Gasoline 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 tax on parking, a tax on air travel, a tax inversely proportional to the density of cities, a carbon tax like at the federal level (or a reduction in Quebec carbon market quotas), etc.

Isn’t that a good offer?

That said, the income tax cut proposed by the Caquists could be better targeted, according to a study by economists from the University of Sherbrooke.^⁠3. They offer two options that would better stimulate work and further reduce the gap with Ontario, a target dear to François Legault.

In Quebec, taxpayers earning between $20,000 and $85,000 have the highest tax rate differentials with Ontario (7.5 percentage points difference). And what’s more, the $35,000-$60,000 have the highest marginal effective tax rates.

During the election campaign, the CAQ proposed to lower each of the first two tax brackets by one percentage point. This $1.86 billion tax cut would provide the largest tax reductions to those earning $100,500 and over ($814 per taxpayer).

To further target the $20,000-$80,000 range, the study suggests reducing the 3^e tax bracket by 2 percentage points (rather than just one) and to raise to $84,000 (rather than $98,540) the threshold from which the 3^e rate.

By doing so, the biggest beneficiaries of the tax cut would be those with $86,000 in taxable income, with a gain of $1,013, while those $100,000 and over would only get $413 in tax reduction. . The 2^e of their suggestions gives quite similar results.

The Legault government has indicated that it wants to finance its tax cut by reducing payments to the Generations Fund (and therefore by indebtedness). According to the study, with this tax cut, Quebec will have to plan for 15 years (by 2038) to reach the average net debt of Canadian provinces (29.1% of GDP), compared to 10 years without this tax cut. taxes (2033).

As of March 31, 2023, Québec will have a net debt of some $199 billion, as of the 3^e rank of Canadian provinces (after Newfoundland and Labrador and Ontario), which will be equivalent to 36% of its GDP.

Value of Hydro-Quebec

The study does not mention the market value of Hydro-Quebec, an asset held by the Quebec state that has no comparable in other provinces. By taking this market value into account, our debt/GDP ratio would be reduced by the equivalent of 9 percentage points, which would bring it today below the average of the other provinces, I calculated⁴.

My offer, in short: for a tax cut, an increase in environmental taxes and a moderate reduction in our relative debt. Bargain ?