Budget retrospective, Part 1

REVISED

I was going to do up a big post today digesting some of the comments of others on the budget, crunching some of the numbers and offering some of my viewpoints. However, this is proving to be rather impossible to do all at once because the number crunching, at least in terms of income taxes, has been way more complicated than I would have thought and I have a lot more to say than I would have thought.

So, this will be the first in a multi-part series. In Part 1, I will cover the increasing taxes in the budget.

Future editions over the course of the next few days will cover departmental spending changes, capital/infrastructure spending, whether or not the budget really is balanced, did the Liberals *really* budget for all of their promises and what was the Grant Thornton report talking about when it said there would be a $300 million shortfall.

Before I get into the true meat of "Part 1", I am going to over a brief background on my thoughts on the budget which is relevant to this part and will be to all subsequent parts.

The budget, on the surface, has a surplus of $37.1 million. Therefore, some have argued, there could have been $37.1 million less in tax hikes or spending cuts or some combination of the two. I don't think that that is a valid argument. Finance Minister Victor Boudreau admitted in his budget presentation the following:

In late-February, the province received confirmation that because of significantly higher world zinc prices resulting from strong demand, which are expected to remain high, metallic minerals tax revenue will reach an unprecedented level. The value of zinc produced in New Brunswick increased from $408 million in 2005 to over $902 million in 2006. For 2007-2008, revenue from the metallic minerals tax of approximately $70 million is anticipated. In comparison, this revenue source has averaged $4 million annually over the past two decades. This is a significant, extraordinary development.

If current volume levels and prices are sustained, this could potentially translate into revenue windfalls over the next several years. This will not be long-lived, however, as the operating life of Brunswick Mines is expected to run its course by 2010.

Translation: We are getting off lucky because we have a resource commodity which has a high price, but this is not a cash cow for life and if we don't buckle down now, we'll have to see way bigger tax increases and spending cuts a few years down the road. Keeping the budget balanced and thus giving us breathing room going ahead is a good idea, we should not be running just barely in the black or barely in the red, the province has a debt to pay and at least one big source of revenue is going to disappear so just barely meeting our expenses is not good enough.

Now I have already taken the Liberal Party to task for cancelling the HST rebate. It was bad policy and I support its being cancelled, however the Liberals did say they would keep it during the campaign and today say they never made that promise. That is untrue and unfair. They should have admitted their mistake, and quite fairly thrown a lot of blame on the Tories for claiming the rebate was ready to go when they didn't actually plan to prepare it at all, and said "we're sorry but this has to go". Or at least kept their word and implemented the bad policy. Claiming they didn't make the promise to slither away from breaking a promise is not cool and I will not condone it.

However I see my friend Spinks is pinning to the Liberals a trio of items which he portrays as screwing the people. a) the aforementioned HST rebate cancellation, b) the income tax hike I will get into later and c) a lack of a cap on property tax assessments. The third one is unfair. The Liberals have never supported the cap because it is bad public policy and it doesn't make any sense at all. However, the Liberals have addressed the issues of raising property assesements by increasing the unconditional grant to our municipalities, something the Tories promised twice but instead slashed it and then froze it forcing the municipalities to up property taxes - their only other source of revenue. Boudreau's budget gives our cities, towns and villages an extra $1.3 million in transfers which should go a long way to addressing property tax increases.

So anyway, I got into a bit of a rant there, but now let's get into some of the research I have been able to do on the tax increases.

Part 1 - Tax Hikes

Raising taxes is never popular and I don't think any government of any stripe would do it unless they thought it was absolutely necessary because it is politically unpopular and dangerous. I'll begin with income taxes which are the most relevant to everyone because almost everyone pays them.

As I mentioned yesterday, each of New Brunswick's four tax brackets will see an increase. The first bracket, for income under $33,450, goes up 0.44 from 9.68% to 10.12%, the next bracket, for income up to $66,902, goes up 0.66 from 14.82% to 15.48%, the third bracket, for income up to $108,768, goes up 0.28 from 16.52% to 16.80% and the highest bracket, for income above $108,768, goes up 0.11 from 17.84% to 17.95%.

Now to explain how this works, if you make $109,000 you don't pay 17.95% on all of your income, you pay each portion at each threshold. So, if that was your income, you would pay the lowest rate on $33,450 of your earnings, the second rate on $33,452 of your earnings ($66,902-$33,450), the third rate on $41,866 of your earnings ($108,768-$66,902) and the top rate on the $232 you haven't already paid tax on. In addition to this, everyone gets the tax back on the first $8,061 you earned and a whole bunch of other possible deductions.

Before I get too deep in the number crunching, I want to point out one thing that has gone under-reported. The Liberals in this budget have brought back a measure that will save you money in years ahead. They have brought in bracket-indexing. So, in 2007, you pay taxes at the lowest rate for money up to $33,450. In 2008, that number will increase by the rate of inflation so you will pay the lower rate on more money. This is how it used to be but the Tories, not wanting to raise taxes but needing to do so anyway, undid this measure a few years back and essentially raised taxes through the back door.

So, let's see what effect this has on a variety of incomes. For simplicity sake, I have calculated this for a person filing a single income and having no deductions beyond the basic $8,061 claim.

If you made $30,000 this is how it would work out:
2006 provincial income taxes: $2123.70
2007 provincial income taxes: $2220.23
Increase: $96.53
2006 actual percent of income paid in provincial income tax: 7.08%
2007 actual percent of income paid in provincial income tax: 7.40%
Increase: 0.32%

I did the same for the following levels of income:

• $50,000: +$220.90, +0.44% (10.26% vs. 9.82%)

NOTE: the following numbers were in error in the original post, due to a miscalculation on my part

• $75,000: +$354.72, +0.47% (12.14% vs. 11.67%)


• $100,000: +424.72, +0.42% (13.31% vs. 12.88%)


• $150,000: +494.88, +0.33% (14.79% vs. 14.46%)


• $250,000: +604.88, +0.24% (16.05% vs. 15.81%)


• $500,000: +879.88, +0.18%% (17.00% vs. 16.83%)


• $1,000,000: +$1429.88, +0.14% (17.48% vs. 17.33%)

So what we see here is because the increase in the top tax bracket is the smallest, the more money you make (beyond $109,000) the less of a tax increase you see, which I don't like very much.

Now, according to the budget news release, "even with this measure, New Brunswick still has the lowest personal income tax burden in Atlantic Canada". Is this statement true? Yes and no.

Talking in a simple matter of tax brackets, it is not, but it already wasn't. For the lowest tax bracket, Nova Scotia was already below us at 8.79%. However, New Brunswick has the highest personal exemption of any of the Atlantic Provinces so it may equal out. Let's compare our poor guy who made $75,000 and took a huge hit in this tax hike with an increase of nearly 3% half a percent.

In New Brunswick, at an income of $75,000 you will pay $8753.48 in 2006 and $9108.20
in 2007. Now assuming there are no tax hikes in the other Atlantic Provinces, here is what someone making the same income would pay:

Prince Edward Island: $8784.62
Nova Scotia: $9026.59
Newfoundland & Labrador: $9976.53

So the guy who makes $75,000 goes from being the lowest taxed in Altantic Canada to the highest taxed! second highest taxed.

Not a lot of New Brunswickers make $75,000/year however. So let's compare our guy making the more average $30,000/year. In New Brunswick, in 2006 he'd pay $2123.70 and in 2007 he'll pay $2220.23.

Nova Scotia: $2026.69
Prince Edward Island: $2213.62
Newfoundland & Labrador: $2411.02

So the guy making $30,000/year gets dinged, relatively, too but not as much. He moves from the #2 spot to the #3 spot.

The benchmark that the New Brunswick Department of Finance uses is a family with 2 (I think) dependents and a joint income of $40,000, some of which can be transfered to a spouse if it is a single source. In that regard, we apparently were the lowest and continue to be the lowest but it would be too complicated for me to do the calculations to verify.

Now from coast-to-coast, just looking at tax brackets, this is were we fit in:

In the low bracket we move from fourth lowest to sixth, jumping ahead of PEI (9.8%) and Alberta (10% for all).

In the second bracket, we move from seventh lowest to eighth, jumping ahead of NS (14.95%).

In the third bracket, we move from fifth lowest to severth, jumping ahead of NS (16.67%) and PEI (16.7%).

In the fourth bracket*, we are unchanged, remaining as the ninth lowest.

*Note, not all brackets are the same or as numerous. BC has five brackets, and many provinces have only 3. These brackets match up roughly but not exactly. In the case of the majority of provinces which do not have a fourth bracket, all income above the $60-70,000 range is taxed at the same rate while in New Brunswick, BC and Saskatchewan a higher rate kicks in at around $100,000. Therefore, our fourth bracket compares to many provinces third bracket.

New Brunswick's personal exemption, which will now be indexed to inflation and therefore go up every year, is relatively generous, only BC and Alberta offer a higher excemption. Our lowest tax bracket is also very generous at ~$33,500 (and now increasing every year thanks to indexing) where most provinces are at around $29,000 to $31,000.

After this analysis, I am less pleased with these tax measures than I was before. While I do think that tax increases were the prudent thing to do, I think that the increases in brackets 3 and 4 should have been higher, and the increases in bracket 1 and 2 lower - perhaps non-existent. With Francis McGuire saying the key to our future is to get wages higher - comparable to Ontario - and with the guy making $75,000 seeing a 2.86% tax increase, things don't seem to match up very well. therefore, the guys making wages comparable to the middle class in Ontario - $60,000 to $70,000 - shouldn't be bearing the brunt of this tax increase, which they are. Someone making $50,000 sees their taxes go up 0.44% and someone making $75,000 goes up 0.47% while a millionaire only gets a 0.14% increase.

However, the Liberals did take great pains to say during the campaign that the era of income tax cuts would be over if they took office and they have been warning since they took office and particularly since Decemeber that tax hikes were a serious possibility. I don't think you can fault them for dishonesty in this measure, though I will now officially join the chorus of those who think this was a badly implemented tax increase. Though I will say again hooray from bracket indexing.

UPDATE: The numbers for taxes on income above $66,902 were wrong and have been corrected above and some of my comments adjusted as a result however those in the middle band of income are still the hardest hit - just not as hard as I thought - and most of my criticisms remain unchanged, though I am far more happy than I was yesterday.

Business taxes

The coroporate tax increase to me is not a big deal. It isn't really an increase at all but just a cancellation of the Tory reduction scheduled for 2007. Corporations will now pay the same tax for 2007 as they did in 2006. Moreover, New Brunswick remains a friendly tax environment for business with our rate remaining the fourth lowest in Canada. I have no problem whatsoever with this measure.

Now, when we get to the small business tax rate, I get a little angry. This rate was scheduled to drop to 1% from 1.5% on January 1, 2007 but will now increase to 5% instead. The ceiling from which you are defined as a small business will slip from $475,000 to $400,000. So as a result all small businesses will see their taxes increase 3.5% and for those poor bastards whose businesses make between $400,000 to $475,000 they will see their tax rate jump from the 1.5% small business rate to the 13% corporate rate. That is INSANE. A business that made $425,000 in 2006 and the same in 2007 will see their tax bill skyrocket from $6375 to $55,250. An increase of over 8 and a half times.

Notwithstanding this measure, New Brunswick still has one of the best tax systems for small buiness so this measure won't likely cause samll businesses to move elsewehere. However, the tax regime for small businesses was probably the only thing the Lord government ever did that I was 100% supportive of. It increased the ability of people to be innovative, inventive and entrepreunerial. They have been robbed of that in this budget and I am not very happy about it.