At a time when many Islanders are concerned about the cost of living, it isn’t only the price of goods and services that impacts their bank accounts. Taxes also have an impact, and in its upcoming budget, the next government in Charlottetown should eliminate one hidden tax hike in particular.

Prince Edward Island is currently one of only four provinces that does not fully adjust its personal income tax backets to account for inflation, creating a phenomenon known as “bracket creep” (brackets being the range of income where an individual pays a given rate of income tax).

Most other provinces and the federal government adjust these brackets annually based on inflation, to avoid having individuals pushed into a higher tax bracket simply as a result of receiving a salary adjustment that merely kept pace with changes in the cost of living.

A basic example can help to illustrate the issue. An Islander earning $31,984 falls into the province’s lowest tax bracket, where income is taxed at a rate of 9.8 per cent. Inflation in the province in 2022 was 8.8 per cent. Therefore, this worker could receive a raise of 8.8 per cent, bringing their salary to $34,798, which would only result in their salary keeping up with the cost of living.

The problem? This pay adjustment has pushed the person’s salary into a higher tax bracket, where income is taxed at a rate of 13.8 per cent. As a result, this person will pay $388 extra in income tax rather than $275 if the tax bracket itself had simply kept pace with changes in inflation.

That difference of $113 may not initially seem like a lot, but these changes have the strongest effect on those with low incomes who generally struggle to afford basic necessities. Further, this hidden tax increase occurs each year, resulting in a potential difference of thousands of dollars over one’s working life. Of course, the impact is increased during times of high inflation, such as we’re experiencing today.

Consequently, each year Islanders are subjected to what is essentially a hidden tax hike. Again, most governments across Canada have recognized that collecting additional tax revenue on salary adjustments, which only keep pace with the cost of living, is unfair. The federal government began adjusting tax brackets (known as indexing) yearly in 2001, and more recently Manitoba began the practise in 2017 followed by Saskatchewan in 2021.

Aside from P.E.I., Nova Scotia, Ontario and Alberta do not fully index their tax brackets on a yearly basis (though Ontario does index some of its brackets and Alberta has promised to re-introduce full indexing).

Finally, P.E.I. is already among the highest-taxed jurisdictions in North America. One recent study, which measured tax competitiveness across all 60 Canadian provinces and U.S. states, found that P.E.I. applied the fifth-highest tax rate on personal income for those who made $50,000 and the second-highest for those who made $75,000. In other words, bracket creep is one of many ways P.E.I. is uncompetitive with its peers when it comes to personal income taxes.

In its next budget, the government has an opportunity to bring its tax code in line with most other provinces by ending this hidden tax hike. Indeed, adjusting tax brackets for inflation on a yearly basis would represent a good first step to tackling P.E.I.’s overall tax competitiveness problems.