Who could really benefit from tax rollbacks?

Hey there, time traveller!
This article was published 22/01/2020 (2264 days ago), so information in it may no longer be current.

LAST August, the Progressive Conservative Party of Manitoba announced a program of tax cuts over the next four years that would involve reducing the provincial sales tax from eight to seven per cent, removing the PST on home insurance, personal care services, professional tax preparation and the preparation of wills and indexing the basic personal exemption and the personal income tax brackets by the changes in the annual consumer price index (CPI).

The press release said that, in total, these measures would save the average Manitoba taxpayer $2,020 over the next four years and make life more affordable, secure and prosperous for all Manitobans.

To test these claims and to see if alternative changes to the tax system could lead to better outcomes, we modelled the proposed changes using Statistics Canada’s tax/transfer modeling program (SPSD/M, version 28.0). The proposed PCP tax changes were modelled using 2019 as the base year. For that year, we reduced the PST from eight per cent to 7.5 per cent, to reflect the mid-year change in the rate.

For 2020, we reduced the PST to seven per cent and kept it at that amount out to 2023, but we were not able to model the effect of eliminating the PST on the four items listed above. For the Basic Personal Exemption, we kept the announced level of $9,626 for 2019, but increased it by between 2.0 and 2.1 per cent for 2020 to 2023, as indicated by the SPSD/M projected CPI increases.

Similarly, we maintained the personal income tax thresholds at their announced levels for 2019 ($32,670 and $70,610) but increased them by the same changes in the CPI for the years 2020 to 2023.

We then took the aggregate amount of these tax cuts over four years ($1.137 billion) as the budget available to model an alternative use of those foregone tax dollars. The option we chose was to enact a partial refund of the unused portion of non-refundable tax credits (NRTCs). Under the current rules, a tax filer can use non-refundable tax credits only to reduce their basic tax to zero. If the value of their NRTCs exceeds the basic tax, the excess amount is not rebated to them.

Within the total budget constraint of $1.137 billion, we were able to model a rebate of up to $603 per filer for those whose basic tax did not exceed the total value of their NRTCs.

First, we found that the PC plan resulted in total savings of $1,177 per filer and $2,157 per household, as compared to the PC press-release claim of $2,020 per filer. We then compared the distribution of tax savings under these two equal-cost plans and found that the partial rebate of non-refundable tax credits left the bottom 50 per cent of households better off by an average of $716 (or 1.8 per cent of household income) per year.

The poorest 10 per cent of households saw their income rise by seven per cent per year under our partial rebate plan, compared to a 1.6 per cent increase under the PC plan. Conversely, the wealthiest 10 per cent of households saw a 0.13 per cent increase in income under the partial rebate plan, compared to a 0.42 per cent increase under the PC plan.

‘Thus, while both plans led to increases in household income, the partial rebate option provided more income support to lower-income households than the PC plan’

Thus, while both plans led to increases in household income, the partial rebate option provided more income support to lower-income households than the PC plan. As a result, the partial rebate plan reduced the poverty rate by 0.9 per cent (from 13.7 per cent to 12.8 per cent) while the PC plan only reduces the poverty rate by 0.3 per cent, or one-third as much.

While the PC plan spreads the benefits more widely across Manitoba households, it misses an opportunity to assist lower-income households in a significant way through a partial refund of the unused portion of non-refundable tax credits. Our alternative demonstrates that, with the same overall expenditure, lower-income households can be helped more and three times as many Manitobans can be lifted out of poverty through the application of refundable credits, a significant achievement for what amounts to a modest tax reduction measure.

Wayne Simpson is a professor in the department of economics at the University of Manitoba and a research fellow at the school of public policy at the University of Calgary. Harvey Stevens is a retired civil servant and professional affiliate in the department of economics at the University of Manitoba.