The Albertan government often touts how it offers one of the lowest taxed jurisdictions in North America – the so called Alberta “Tax Advantage”. All things considered, this is true; we have no sales taxes, payroll taxes, capital taxes, and we can consider ourselves to have the lowest corporate tax rate.
However, I want to look specifically at provincial income taxes across Canada and show that - even with Alberta's new fiscal plan - our income tax regime primarily benefits the top 5% of earners, and that the majority of Albertans would pay less if we adopted British Columbia’s or Ontario’s tax regime (and collect the same revenues, if not more).
The New Alberta Tax Regime
The 2015/2016 Alberta budget was released in late March, which saw the abandonment of the provincial flat tax for personal income. The 2015 tax year continues with a flat 10% tax rate on taxable income. The new regime starting in 2016 will have the 10% tax rate for taxable income up to $100,000, and income earned above this will be subject to a new bracket; 10.5% in 2016, 11.0% in 2017, and 11.5% in 2018 and thereafter. There will also be an additional, but temporary, tax bracket on income earned above $250,000. This rate will be 0.5% higher than the second bracket, but will expire at the end of 2018.
Understanding Average Tax Rates
What I just said above are Alberta's marginal tax rates depending upon what bracket you are in - it’s what you face for every additional dollar of earn in taxable income. What matters from a taxpayer's perspective is your total tax bill, which is your average tax rate multiplied by your gross income. Your average tax rate is never your marginal tax rate because each Canadian province has a Basic Personal Tax Exemption; all income earned up to that amount is not taxed. As you first earn income, your average tax rate is 0% and starts rising as your income surpasses the exemption limit. In Math speak it rises at a decreasing rate, meaning the average tax rate will approach - but never quite reach - whatever the top marginal tax rate is.
Data and Calculating Average Tax Rates
To calculate average tax rates across all Canadian provinces and territories, you need to know for each province what the basic personal tax exemption is, the marginal tax rates for earned income for each tax bracket, and what the bracket limits are in gross income (see Tax Tips). This excludes taxable income from capital gains and dividends. This is all based on the 2014 tax year.
Using this information, I've taken $500 increments from $0-500,000 of gross income (earned) and calculated the average provincial income tax rate, and what the corresponding tax bill would be. I've purposely left out federal taxes, since this just gets in the way of comparing provinces. This base scenario excludes some tax exemptions that only apply to eligible people, like Age (> 65 yrs), Disability, Caregiver, and Spouse or Common Law amount.
For Alberta, I've calculated average income taxes based on the old tax regime (2014), and the new regime planned for 2018. For the 2018 regime, I use the tax exemption limit from 2014.
I'll try to let the graphs speak for themselves, but there are a few important points to make. For those using a phone or tablet, you may have a better viewing experience by going straight to Tableau Public (here).
1. Alberta Income Tax Regime: 2014 and 2018. This compares Alberta's old "flat" tax regime to what is proposed for 2018. You'll notice that the average tax rate is 0% until $18,000 of gross income, which reflects that provincial income tax exemption I referred to before. The 2018 tax regime is in blue, and overlaps the old one until reaching about $118,000 when the new 11.5% marginal tax rate kicks in.
2. Provinces that tax all income earners more than Alberta. This shows the provinces that tax ALL income earners at a higher rate than Alberta's 2018 proposed regime. It's worth saying that although everyone in Alberta pays a lower rate than these other provinces, that savings from a lower average tax rate widens as income increases. Excluding Quebec (which is in its own atmosphere), an Alberta earning the median income of $39,000 (in 2012) will face an average income tax rate up to 2.8% points less than these other provinces, but 6.6% points less when earning $250,000 (the top 1.5% of earners in 2012).
3. In BC and Ontario however, most income earners pay less...(.) This looks at average income tax rates for the provinces - British Columbia and Ontario, with lower rates for most levels of income compared to Alberta's 2018 proposed regime.
4. ...the average income tax rate difference between Alberta and ON or BC...(.) This looks at the difference in average income tax rates (in % points) between Alberta (2018) and BC/ON. When the graph's line series are positive, it means an Albertan will pay a higher average tax rate than BC or Ontario, and vice versa. Albertans earning between $26-159k pay more compared to BC, and those earning between $26-282k pay more compared to Ontario.
This is a huge range, and it covers the majority of Albertans. Excluding those who earn less than $10k, If we implemented BC's tax regime, about 66% of Albertans would get a tax break. Compared to Ontario, this percentage rises to about 69%. (Based on calculations from provincial income data for 2012). So with the exception of the working poor ($10-25k) or the top 1.5-3% of earners, our regime has you paying more.
Further, even with 66-69% of Albertans paying more than with a BC or ON tax regime, we collect less revenue. The Alberta's governments own Budget 2015 Fiscal Plan report (pg. 86) shows that we would collect - I'm eye balling it here because their graph is a small picture - about $1 billion more with BC income tax rates, and about $2 billion more with ON income tax rates. Note: this scenario by the Alberta government is based on Alberta's 2015 income tax rates, so the 2018 regime would bring it down somewhat from $1-2 billion.
5. ...what this looks like in taxes paid. This shows the same type of information as the previous graph, but shows the difference in average income taxes paid ($) between Alberta (2018) and BC/ON. Hover over the line series at your gross income to see what difference this would make to your provincial income taxes. An Albertan would save about $400 compared to BC when earning $18k, pay about $1,900 more when earning 85k, and save about $4,700 when earning $250k.
There are lots of other ways to consider this data, but I'll leave it here for now. Thanks for reading!