Provincial Tax Rate Adjustments in Canada

Abstract

Changes to tax rates are important fiscal events in Canada. They affect the amount of taxes that Canadian households and businesses pay to governments, and the level of economic activity by affecting incentives to work, save, and invest. Thus it is important to understand what factors cause governments to increase or reduce their tax rates.A recent study by Ergete Ferede, Bev Dahlby, and Ebenezer Adjei sheds some light on some of the factors that determine the timing and direction of tax rate adjustments by provincial governments. The main conclusions from the study are: A province’s fiscal position affects the direction and timing of its tax policy:• Provincial governments that start with higher corporate, personal, and sales tax rates are more likely to cut, and less likely to raise, their tax rates.• A higher provincial budget deficit reduces the probability of a corporate tax rate cut and raises the probability of a sales tax rate increase. • An increase in the provincial corporate income tax rate is more likely in a year in which the provincial government raises its personal income tax rate and vice versa.