The 2022 edition of the Tax Report1 shows that even if the tax revenues collected in Québec decreased in 2020, their decrease was nevertheless less than that of the GDP. It also shows that the weight of taxation in the Québec economy has never been as high in 2020 as it has been in the past 20 years.
Posted yesterday at 2:00 p.m.
From there, it is interesting to compare the tax effect of COVID-19 to that of the Great Recession of 2008. Taxation patterns have been affected very differently. During the Great Recession, personal income tax revenues took the biggest hit, while sales taxes held up better; today, we see the opposite. Obviously, this is explained.
In Canada, as elsewhere, government financial support measures have helped limit the impact of the pandemic on income tax yields.
Conversely, COVID-19, and the resulting confinement, had the effect of reducing the consumption of goods generating sales taxes. And the reduction in travel has also affected the yield of the gas tax.
The effects of COVID-19 on the cost of certain tax measures are also observed. If the closure of large parts of the economy has reduced the GST-QST collected, in particular in restaurants, it has on the other hand increased the cost of the zero-rating of basic groceries. Also, teleworking has led to the creation of a special deduction to take it into account and has resulted in a reduction in the cost of the refundable tax credit for childcare expenses.
Labor scarcity
Even if the demographic transition had been foreseeable for years, it was not until we saw firsthand the effect of the scarcity of labor in several sectors of activity to really become aware of this challenge of the decade in Quebec. . Admittedly, work incentive measures have been put in place to try to mitigate it. For example, the tax credit for career extension is now one of the largest tax expenditures for workers aged 60 and over. Also, the federal Minister of Finance has the mandate to set up a credit similar to that of Quebec.
Taxation can influence older people’s work decisions. In this regard, other avenues have also been put forward, in particular making QPP contributions optional, as elsewhere in Canada, for people aged 65 and over, or making the current credit for career extension refundable.
Whatever some may think, the financial interest of continuing to work is already there for retirees. In fact, the rate of retention of work income is higher than many believe. We must focus on changing the perception, because staying or returning to the labor market is profitable. By way of illustration, a low-income senior retains 89% of the $5,000 of work income that he gets, a real increase in his standard of living.
Taxation and economic growth
It is recognized that some taxes are more harmful than others to economic growth. As such, sales taxes are a less damaging source of revenue than income taxes. However, Quebec is sailing against the tide of the Organization for Economic Co-operation and Development (OECD) by overusing more harmful methods of taxation and under-using less harmful methods.
And these are not small deviations. For 2020, the relative importance of income taxes in Québec’s tax structure is more than 45% higher compared to the average tax structure of OECD countries.
Conversely, revenues from general sales taxes appear to be more than 30% lower.
At a time when the government is expressing a clear desire to act to raise the standard of living in Québec and when the demographic transition will slow down economic growth over the next decade, the possibility of moving towards less harmful taxation must be considered.
2022: an election year
At the start of 2022, the Omicron wave is sweeping through Quebec, leading to the return of health restrictions that could affect both economic growth and the evolution of government revenues and expenditures.
The current government of Quebec has implemented most of its tax program (improvement of the family allowance, reduction of the school tax, elimination of the additional contribution for subsidized childcare services, increase in measures for natural caregivers). What will the next budget have in store for us, the last one before the general election? What will be the fiscal promises of political parties? Certainly, there will be commitments regarding the health system, climate change and labor market adaptation.
Whatever they are, these new commitments must be made in compliance with the return to balanced budgets and the financial framework of the next pre-election report on the state of Québec’s public finances.