A decade of eroding tax fairness in BC

June 30, 2011

Ask a British Columbian about taxes these days, and you’ll likely hear about the HST. But the HST is just one of many tax changes over the past decade, and its introduction is only one small piece of a larger story of eroding tax fairness.

Most British Columbians would agree that everyone should pay their fair share of taxes. And most assume that the wealthy pay more, not only in straight dollars, but also a higher tax rate as a share of their income.

But, in reality, that is no longer how our provincial tax system works.

A new report we have co-authored examines changes to the provincial tax system over the last decade. We look at the total provincial tax rate for households at different income levels (the actual tax bill as a share of household income for all personal provincial taxes combined –– income, sales, carbon and property taxes, and MSP premiums).

Using a Statistics Canada database that draws on tens of thousands of tax files, we find that BC now has a tax system where the rich pay a lower total provincial tax rate than the rest of us.

In 2000, most BC households paid about the same total tax rate, with the richest 10% paying a little more. By 2010, however, the tax system had become regressive, with the richest 20% of households paying a lower total tax rate than middle-income ones, and they in turn paying a lower rate than poor and modest-income households.

How did this happen?

The BC personal income tax system remains mildly progressive, meaning as household income rises, so too does the tax rate. The problem, however, is that income taxes have fallen over the last decade, with the largest tax cuts benefitting primarily upper-income earners.

Other taxes we pay –– sales, carbon, property, and MSP premiums –– are not progressive, but rather, cost middle and lower-income households more as a share of their income.  The provincial treasury now relies more heavy on sales tax income than it does on income tax, and, amazingly, collects more from MSP premiums than it does from corporate income taxes.

The net result is a profoundly regressive tax shift.  For example, as of 2010, a household in the bottom 20% of the income spectrum pays total provincial taxes of about 14-15% of their income, a middle-income household pays a total tax rate of about 13%, and the wealthiest 20% pay a total provincial tax rate of about 11%.

And while total taxes are down for all British Columbians, we have not all benefitted equally. Tax cuts between 2000 and 2010 delivered an average of $9,000 per year to the richest 10% of BC households, and a whopping $41,000 to the top 1%.  In contrast, middle-income households received an average tax cut of about $1,200, and lower-income ones got about $200 per year –– savings that are likely wiped out by increases in Hydro and other fees.

A big reason for these huge differences is the growing gap in earnings and income. Our provincial tax system, instead of helping to offset the growing income gap, is now contributing to the divide.

These tax cuts come at a price –– foregone government revenues and reduced public services. Between 2000 and 2010, BC’s tax revenues fell by 1.7% of GDP. That may sound like a small change, but it’s equivalent to $3.4 billion a year –– money that is no longer available to reduce the deficit or to spend on needed public services.

It’s time for the provincial government to restore fairness to our tax system. Once the HST debate is behind us, a Fair Tax Commission should be initiated. Such a commission should engage British Columbians in a broad deliberative process, and examine: a) how much money we need to raise to fund the services and infrastructure we want to pay for together; and b) how to raise these revenues in a equitable and efficient manner.